Historically doing business in India has been relatively about focus on operations with primary concern of the management being profit maximization with limited focus on
statutory compliance. The advent of globalization has opened up a lot of opportunities for businesses to expand their horizons. However, this has also increased the complexity of operations. The regulations also have undergone a sea change to keep up with the new challenges. The ecosystem has become more alert with media becoming a powerful force that has a keen and watchful eye on all things newsworthy.
The combination of global financial crisis that emerged in the year 2008, along with the Indian banking crisis, has led to the creation of large scale Non Performing Assets (NPAs). This combined with huge amounts of money being siphoned off by the promoters has led to stricter statutory requirements to curb such malpractices.
As a result of globalization and industrialization, compliance has increased multifold over the past decade in India. Now business organizations must focus on compliance with various Statutory Requirements in order to survive in the industry. Further, the shift would also require setting up of well structured, documented and demonstrable compliance structure that help management monitor and report compliance risk and composure as well as compliance status to the board.
What is statutory compliance?
The word statutory means “of or related to statutes”. We know this as rules and regulations. Compliance means adherence. Thus, Statutory Compliance in simplest terms, means adhering to rules and regulations.
In order to cope with the demanding regulatory environment, it is vital that organizations sit up and take notice of the different laws. They need to devise efficient and effective ways to maintain compliance to these laws and minimize their risk. Most organizations understand the importance of regulatory compliance in preventing unethical conduct and violations of law. It’s the necessary evil that is mandatory, but it also takes up valuable time, effort and resources from folks who would much rather be working on projects that innovate, inspire, and motivate, leading to greater value creation. The word compliance in itself often conjures up thoughts of what organizations must do rather than what they
want to do. And let’s be honest – doing the right thing isn’t always fun.
Challenge of Compliance Requirements in India
Every business in the current regime would involve compliance with various regulations. Some of the common regulations which would require to be complied by every business are as follows:
- Direct Taxes
The Central Board of Direct Taxes (CBDT) – a statutory body formed under the Central Board of Revenue Act, 1924 – is responsible for administration of direct taxation in India. Every person is required to pay tax on Income earned in India and abroad in case of Indian Resident as determined as per Income Tax Act, 1961.
With the increase in complexities of transactions and further focus to make India a more tax compliant country and a push to improve its Tax to GDP ratio from its current rate of 17.82% in FY 2016-17 to the OECD average of 34% has resulted to various types and complicated types of taxes and compliance requirements such as:
- Self-Assessment Tax (including Corporate Tax to other than individuals)
- Advance Tax
- Minimum Alternate Tax (MAT)
- Alternate Minimum Tax (AMT)
- Tax Deducted at Source (TDS) along with furnishing of TDS returns Form 24Q, Form 26Q and Form 27Q.
- Tax Collected at Source along with furnishing of TCS returns in Form 27EQ.
- Equalization Levy along with furnishing of Form-1.
- Dividend Distribution Tax (DDT).
- Buy back Tax.
- Requirement to furnish Form 15CA and Form 15CB in case of any payments made to Foreign Companies.
- Separate computation in case Capital Gain Tax along with certification required in Form 3CEA in case Slump Sale.
- Compliance with Transfer Pricing documentation and certification in Form 3CEB in case of any international transactions with Related Parties falling within the definition of ‘Associated Enterprises’.
- Compliance with Chapter X-A of the Income Tax Act, 1961 relating to General Anti-Avoidance Rule (GAAR).
- Compliance with the requirements of Base Erosion and Profit Shifting (BEPS) Action Plan such as Form 3CEAA (Master File), Form 3CEAB (Intimation by a designated constituent entity of an international group), Form 3CEAC (Intimation by a designated constituent entity of an international group, the parent of which is not resident in India), Form 3CEAD (Country by Country Report), Form 3CEAE (Intimation on behalf of the International Group).
- Indirect Taxes
The following are major indirect taxes applicable in India:
- Goods and Service Tax (GST) – Required to be paid in case of taxable supplies
- Custom Duty in case of Import and Export of Goods
- Excise Duty in case of Alcohol, Petroleum Products, Tobacco and Tobacco products
- Securities Transaction Tax (STT)
Goods and Service Tax (GST)
Upon amendment of Article 368 of the Constitution as notified on 08th September 2016 made possible implementation of Goods and Service Tax in India which replaced the existing Indirect Taxes with effect from 01st July 2017.
- Monthly filing of returns in GSTR 3B and GSTR 1
- Requirement to match Input Tax Credit availed with GSTR 2A.
- Filing of GSTR 9 (Annual Returns)
- Requirement of GST Audit and filing of GSTR 9C in case if turnover exceeds Rs. 2 crores for Financial Year
- Possibility of GST Refund in case of Exports of Goods or Services
- Possibility of transfer of Input Tax Credit from one branch to another by registering a branch as Input Service Distributor (ISD) and Filing of GSTR 06
- Possibility of removal of goods for Job Work without payment of duty by disclosing the details in Form GST ITC-04
- Payment of GST on Reverse Charge Mechanism in certain specified cases
Custom Duty (i.e. Basic Custom Duty and Social Welfare Surcharge on Basic Custom Duty) shall be applicable in case of import of goods into India and export of India from India.
- Companies Act
The Companies Act, 2013, an act to consolidate and amend the law relating to Companies. It is an Act of the Parliament of India on Indian Company Law which regulates incorporation of a Company, responsibilities of a Company, Director’s, Dissolution of a Company.
There have a slew of amendments to the Companies Act in Companies Amendment Act, 2019 to ensure more accountability and better enforcement to strengthen the Corporate Governance norms and Compliance Management in Corporate Sector. The various regulatory compliance required are as follows:
- Filing of Annual Accounts in AOC-4
- Filing of Annual Returns in MGT-4
- Filing of Appointment of Auditor in AOC-1
- Filing of Cost Audit Report in CRA-4
- Filing of resolutions with MCA regarding Board Report and Annual Accounts in Form MGT-14
- Requirement to file Form Micro, Small and Medium Enterprises (MSME) in case of half yearly return with the registrar in respect of outstanding payments to MSME
- Requirement to file BEN forms in order to determine the ‘Ultimate/ Beneficiary Owner’ of the Company as per ‘Companies (Significant Beneficial Owners) Rules, 2018
- Requirement to file Know Your Customer (KYC) details in case of all Directors in form DIR-3 KYC
- Foreign Exchange Management Act (FEMA)
The main objectives of FEMA is to reduce restriction on foreign exchange and regulate all transactions relating to Foreign exchange. FEMA mainly governs the following:
- Borrowings in Foreign Currency
- Borrowings from Non Resident
- Issue and Transfer of Shares to a Non Resident
- Foreign Direct Investments / Foreign Institutional Investments etc.
- Labor Law Compliances
These refer to a set of accepted terms of conditions of employment. Labor laws are a series of several regulatory compliances such as:
- Minimum Wages Act, 1948
- Payment of Bonus Act, 1965
- Work men’s Compensation Act, 1923
- Contract Labour Act, 1970
- Factories Act, 1948
- The Equal Remuneration Act, 1976
- The Payment of Gratuity Act, 1972
- Employees State Insurance Act, 1948
- Employees Provident Funds and Miscellaneous Provisions Act, 1952.
- Karnataka Labour Welfare Fund Act, 1965
- Karnataka Tax on Professions, Trades, Callings and Employments Act, 1976
- Environment, health & safety laws:
Protection and conversation of the environment and sustainable use of natural resources and its need is reflected in the following acts:
- The Water (Prevention and Control of Pollution) Act, 1974
- The Air (Prevention and Control of Pollution) Act, 1981
- The Environmental Protection Act, 1986
Why focus on Statutory Compliances?
As stated above that compliance with all statutory requirements is a pre-condition for existence of any business in India. However with India’s push to ensure increase its GDP to 5 Trillion Dollars, Government has increasingly being focused on ‘Ease of Doing Business in India’ and thereby attracting more foreign investment in to the Country.
In view of this the government has being introducing various initiatives in order to assist the Indian businesses which directly contribute the Profitability of Indian Business and improving their Cash Flows. Some of the various initiatives/ schemes which are can be used to improve cash flows and profitability are as follows:
- Merchandise Exports from India Scheme (MEIS) in case of Export of Goods
- Service Exports from India Scheme (SEIS) in case of Export of Services
- Deferred Payment of Import Duty Rules, 2016
- Import of Capital Goods at zero Custom Duty as per Export Promotion Capital Goods (EPCG) Scheme
- Import of Raw Materials at zero Custom Duty under Advanced Authorisation Scheme, Duty Drawback Rules etc in case of subsequent exports
- Refund of GST paid on Inputs and Input Services used in Exported Goods and Services g. Claiming of Withholding Tax done by non-resident outside in India using Foreign Tax Credit
- Settlement of Service Tax or Excise Liabilities under Sabka Vishwas (Legacy DisputeResolution) Scheme, 2019 etc.
Risk of non-compliance
Businesses that do not conform to the rules and regulations specified by the authorities run the risk of non-compliance and this may have heavy implications on the bottom line of the business. Some risks of non-compliance are outlined below:
- Penal actions and financial losses to the organization
- Loss of reputation and business integrity
- Customer loyalty is heavily impacted
- Statutory Compliance Management
- Prosecution to Directors
- Cancellation of licenses
- Withdrawals of tax benefits/ credits etc.
Further the various regulatory authorities such as Ministry of Corporate Affairs, Central Board of Indirect Taxes and Customs (CBIC), Income Tax Department etc require the Directors to furnish assurance with regard to compliance with all applicable laws and thereby making the Director’s personally liable to ensure compliance and penalties and prosecution in case of major lapses.