Volume #15 | IssueNo. 288/2023 | May 2023
While I was under the weather during most of May, a lot of inspiring things around me kept me afloat and spirited.
A series of short one to one, legal mentoring sessions that I undertook online for the Women Startup Programme (WSP4) for NSRCEL@IIM, Bangalore opened my eyes to the diverse kind of problems that women entrepreneurs are trying to solve through their startups – some at the idea stage, some at prototype and some making revenues already. It was heartening to meet women from all over the country of different age groups and backgrounds ‘starting up’ to impact in the areas of healthcare, education, apparel & fashion, communication, food, travel, architecture, eldercare, technology, performing arts etc. While I was enamoured by every story of courage and risk taking, two women touched my heart and kept me ruminating long after the session – Why ? Because they were working on the “WRINKLED ORANGE”.
One of them, a juvenile diabetic (from age 4) is already running a Trust for people with similar health conditions. Having completed her masters in public health administration, she is now on her way to setting up a start up that can provide an AI enabled platform for services and guidance to juvenile diabetics that even allows them to post their stories to reach a wider audience. In her I found a young, confident, articulate woman who was not perturbed by her own medical condition. There she was, gearing up to empower a whole lot of her ‘own tribe’, clearly seeing a business opportunity alongside the charitable activities. Despite joining the call from a noisy public transport in an Indian metro, she was very focussed and clear about what she wanted to convey. What she wanted to solve. What she wanted to even out in the ‘Wrinkled Orange’.
In another session, I had a very poignant interaction with a visually impaired woman who was doing the reverse – building a not-for-profit, tech-driven platform to enable her tribe to sell their products, after successfully leading a for-profit business that teaches and trains visually impaired to use computers and technology. I heard her speak so fluently and boldly on screen and was eager to see the face behind the voice. I was taken aback when she switched on the video. She was struggling to focus on my face, even as she was referring to her prepared questions from her laptop. She knew exactly what she wanted and had the blue print of her business in her mind. Despite the lack of vision, her eyes sparkled and her face smiled. She teared up when she found a patient listener in me, willing to understand what personal challenges she has been facing since the age of 24 when she lost her eyesight. I gave her the time she needed to settle down on the conversation and assured her that deferring setting up a limited company for sometime till she moved beyond the ideation stage would help. I felt a lump in my throat when she said “ma’am you are my light-house in this hour of darkness”. I wondered who the real light-house is – between the two of us. However, I had no doubt she was the one solving the ‘Wrinkled Orange’.
Well, I have referred to WO three times already. What is it? I was quite fascinated when I heard this phrase for the first time last week from Air Vice Marshal Shankar, who was the chief guest for the anniversary celebration of one of my NGO clients, Vonisha Foundation. He lauded the founder for picking on the ‘Wrinkled Orange’ (i.e. problems or challenges) in the society and solving them innovatively. The Foundation is working in the space of underprivileged childrens’ education, women empowerment, environment, skill development and sports. Quoting how, startups like Oyo solved a societal problem that they saw or how the first man went up on the moon thanks to a visionary leader’s dreams and determination – both through innovative solutions, he applauded the efforts of the Foundation in ‘breaking the barriers and bridging the gaps’ to transform lives. He reiterated that while many of us discard wrinkled oranges, a few like the Foundation pick them up and iron out the wrinkles that makes a difference to the society. While all of us cannot do societal good directly, we can support such genuine NGOs in our own ways to touch lives – both theirs as well as ours. I feel satiated that thanks to my governance profession, I am able to mentor such Founders, offer pro bono services and also connect them with eager CSR donor corporates. It is an ecosystem that all of us have to build and thrive in.
Let me conclude by recalling two dreams that have inspired me this month – one, of a young woman entrepreneur from Chennai (from the startup programme) who is conducting story-telling sessions for children in remote areas as a means of improving communication. She dreams that one day a TED speaker will emerge from such children !! Second, of the Vonisha Founder Dr. Naga Subramaniam who dreams of producing an Olympic champion from the privileged (nay, they aren’t underprivileged as their teacher pointed out to us) slum children whom they groom !!
The 288th issue of Samhita wishes all the dreamers and doers much success and joy in their endeavours. This new look and feel publication, that comes in as a whiff of fresh air is brought to you by our new vendor-partner, Vector Vibe (https://vectorvibe.com/). Hope you like it as much as we do. As always, regulatory updates and changes started trickling in through the month and gained momentum in the last week adding much food for thought under PMLA regulations, angel tax changes and others. There is never a quiet, stable moment in the compliance world – it is dynamic, responsive and at times reactive – keeping all of us on our toes.
PMLA Notification and Its Impact on Professionals
The Prevention of Money-Laundering Act, 2002 (“PMLA”) is an Act that aims to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.
As per PMLA, “reporting entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession. Clause (sa) of Section 2(1) of the PMLA defines “person carrying on a designated business or profession” and the same reads as follows:-
(sa) “person carrying on designated business or profession” means,-
- a person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino
- Inspector-General of Registration appointed under section 3 of the Registration Act, 1908 (16 of 1908) as may be notified by the Central Government
- real estate agent, as may be notified by the Central Government
- dealer in precious metals, precious stones and other high value goods, as may be notified by the Central Government
- person engaged in safekeeping and administration of cash and liquid securities on behalf of other persons, as may be notified by the Central Government or
- person carrying on such other activities as the Central Government may, by notification, so designate, from time to time.
Sub clause (vi) provides full-fledged power to the Central Government (“CG”) for bringing in any activity under the ambit of clause (sa) and in turn widen the net of reporting entities under the PMLA. Reporting entities have various obligations under the PMLA such as verification of identity of clients and beneficial owners through Aadhaar / Passport / similar identity proofs, enhanced due diligence for certain transactions, maintenance of records of prescribed transactions for 5 years from the end of transaction/business relation with client, verifying the financial position of clients, reporting suspicious transactions to FIU-India etc.
In exercise of powers conferred on the CG, the Ministry of Finance has notified a set of transactions or activities via two different notifications which has initiated discussion among professionals on the need to exercise diligence while dealing with their clients for such transactions.
The Ministry vide their notification dated May 03, 2023 has notified that where any of the financial transactions prescribed in the said notification are carried out by relevant persons on behalf of their clients, such persons will be treated as “person carrying on designated business or profession” i.e. they shall in turn become reporting entity for the purpose of PMLA. The financial transactions prescribed in the notification are as follows:
- buying and selling of any immovable property
- managing of client money, securities or other assets
- management of bank, savings or securities accounts
- organisation of contributions for the creation, operation or management of companies
- creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities.
The notification also specifies that “relevant person” includes a practising CA, CS and CWA. Accordingly, all the obligations specified for a Reporting Entity under the PMLA will have to be complied with by the said professionals while carrying out the prescribed transactions.
Further, on May 09, 2023 the Ministry has notified additional set of activities that will fall under the purview of clause (sa) of Section 2(1) of the PMLA when carried out in the course of business on behalf of or for another person. The same are as follows:-
- acting as a formation agent of companies and limited liability partnerships
- acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a firm or a similar position in relation to other companies and limited liability partnerships
- providing a registered office, business address or accommodation, correspondence or administrative address for a company or a limited liability partnership or a trust
- acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another type of trust; and
- acting as (or arranging for another person to act as) a nominee shareholder for another person
It is interesting to note that as per the aforesaid notification, the following activities shall not be regarded as activity for the purpose of section 2(1) (sa) of the PMLA:-
- any activity that is carried out as part of any agreement of lease, sub-lease, tenancy or any other agreement or arrangement for the use of land or building or any space and the consideration is subjected to deduction of income-tax as defined under section 194-I of Income-tax Act, 1961 (43 of 1961); or
- any activity that is carried out by an employee on behalf of his employer in the course of or in relation to his employment; or
- any activity that is carried out by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of a company to the extent of filing a declaration as required under clause (b) of sub-section (1) of section 7 of Companies Act, 2013 (18 of 2013); or
- any activity of a person which falls within the meaning of an intermediary as defined in clause (n) of sub-section (1) of section 2 of the Prevention of Money-laundering Act, 2002 (15 of 2003).
The series of notifications have led to intense deliberations in the last month among the professional community. While some are of the view that it is in the spirit of strengthening our economy, others perceive it to be onerous in nature. In any case professionals have the additional responsibility of creating robust systems and processes for delivering certain services and maintenance of records in compliance with PMLA.
Usage of International Credit Card Covered Under LRS
Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 that exempted the usage of International Credit Card by a person for making payments to meet expenses while such person is on a visit outside India has been omitted vide Ministry of Finance notification dated May 16, 2023.
Accordingly, such transactions will be subject to annual limit of USD 2,50,000 applicable under Liberalised Remittance Scheme.
Open Ministry of Finance Notification dated May 16, 2023
MCA vide notification dated May 10, 2023, has notified the Companies (Removal of Names of Companies from Register of Companies) Second Amendment Rules, 2023 (“Amendment Rules”). The reference to relevant forms in provisos to Rule 4(1) has been replaced with corresponding section numbers through the Amendment Rules as follows:-
- Form AOC-4 or AOC-4 XBRL- replaced with the words “financial statements under Section 137”
- Form MGT-7 – replaced with the words “Annual Returns under Section 92”
- Form STK 7 – replaced with the words notice under “sub section 5 of section 248”
MCA vide notification dated May 15, 2023 has notified the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2023 which shall come into force w.e.f June 15, 2023. Timelines have been specified for raising objections or suggestions and issuing of order confirming the merger under Section 233 of the Companies Act, 2013 (applicable to Startups, small companies, holding-WOS) as follows:-
- Registrar Of Companies (“ROC”) & Official Liquidator (“OL”) to provide objections or suggestions within 30 days of receipt of scheme.
- Where objections or suggestions are not received from ROC & OL and the Central Government (“CG”) is of the opinion that such scheme is in public interest or in the interest of creditors, CG may issue a confirmation order of such scheme in Form No. CAA 12 within 15 days of expiry of aforesaid period of 30 days.
- If CG does not issue confirmation order within 60 days of receipt of scheme, it shall be deemed that it has no objection and the confirmation order shall be issued accordingly.
- Where objections or suggestions are received from ROC or OL or both: –
- If CG is of the opinion that the objections or suggestions are not sustainable and that the scheme is in public interest or in the interest of creditors, CG to issue confirmation order in Form No. CAA 12 within 30 days of expiry of 30 days’ period to provide objections or suggestions.
- If CG is of the opinion that scheme is not in public interest or in the interest of creditors based on the objections or suggestions or otherwise, CG to file an application before the Tribunal within 60 days of receipt of scheme in Form No. CAA 2013, requesting the Tribunal to consider the scheme under Section 232 of the Act.
- If CG does not issue confirmation order under clause a) or does not file for an application under clause b) within 60 days of receipt of scheme, it shall be deemed that the CG does not have objection to the scheme and confirmation order shall be issued accordingly.
SEBI vide circular dated May 03, 2023, has prescribed timelines for entities who have listed or propose to list non – convertible securities, securitised debt instruments and security receipts as follows:-
- Issuers having outstanding listed non -convertible securities as on August 31, 2023 shall report or obtain and report LEI to Centralized Database of Corporate Bonds on or before September 01, 2023.
- Issuers having outstanding securitised debt instruments and security receipts as on August 31, 2023 shall report or obtain and report LEI to Depositories on or before September 01, 2023.
- Issuer proposing to list non-convertible securities or securitised debt instruments and security receipts on or after September 01, 2023 shall report LEI to Centralized Database of Corporate Bonds and Depositories respectively at the time of allotment of ISIN.
In the Union Budget 2023-24, TCS on remittances under Liberalised Remittance Scheme(“LRS”) was increased from 5% to 20%.
A press release has now been issued by the Ministry of Finance on May 19, 2023 clarifying that any payments made by an individual using his/her international Debit or Credit cards upto Rs 7 lakh per financial year will be excluded from the LRS limits and hence, will not attract any TCS. Further, existing beneficial TCS treatment for education and health payments will also continue. The necessary amendment to Foreign Exchange Management (Current Account Transactions Rules), 2000 will be notified in due course.
As per Press Release dated May 19, 2023, the CBDT is considering to modify valuation rules under Rule 11UA of Section 56(2)(viib) of the Income Tax Act, 1961 i.e. Angel Tax provisions. Highlights of the proposed changes are as follows:-
- Proposed to include 5 more valuation methods, available for non-resident investors in addition to existing DCF and NAV methods of valuation.
- Where any consideration is received by a company for issue of shares, from any non-resident entity notified by the Central Govt, the price of such equity shares may be taken as the FMV of the equity shares for resident and non-resident investors subject to certain conditions.
- Valuation report from Merchant Banker not older than 90 days prior to date of issue to be made acceptable.
- To account for forex fluctuations, bidding processes and variations in other economic indicators, etc. which may affect the valuation of the unquoted equity shares during multiple rounds of investment, it is proposed to provide a safe harbor of 10 % variation in value.
The CBDT is also proposing to notify entities being non-resident investors for whom the Angel Tax provisions shall not apply and the same are as follows:
- Government and Government related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies including entities controlled by the Government or where direct or indirect ownership of the Government is 75% or more.
- Banks or Entities involved in Insurance Business where such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident.
- Any of the following entities, which is a resident of certain countries or specified territories having robust regulatory framework:-
- Entities registered with Securities and Exchange Board of India as Category-I Foreign Portfolio Investors.
- Endowment Funds associated with a university, hospitals or charities,
- Pension Funds created or established under the law of the foreign country or specified territory.
- Broad Based Pooled Investment Vehicle or Fund where the number of investors in such vehicle or fund is more than 50 and such fund is not a hedge fund or a fund which employs diverse or complex trading strategies.
It is also proposed to exempt startups recognized under Para 4 & 5 of the DPIIT notification dated February 19, 2019 from the Angel Tax provisions.
Some of the proposed changes have already been notified by the Ministry on May 24, 2023 which we have carried separately below.
The Ministry of Finance vide notification dated May 24, 2023 has notified that the provisions of Angel Tax shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the said consideration has been received from any person, by a company which is recognized by DPIIT in accordance with para 4 of the DPIIT notification dated the February 19, 2019.
Further vide another notification on the same date, the receipt of consideration for issue of shares from certain class of persons has been exempted from the provisions of Angel Tax. A list of 21 countries for whom the exemption is applicable has also been specified in the notification.
Section 194BA inserted vide Finance Act, 2023 mandates a person, who is responsible for paying to any person any income by way of winnings from any online game during the financial year to deduct income-tax on the net winnings in the person’s user account. Tax is required to be deducted at the time of withdrawal as well as at the end of the financial year. The manner of computation of net winning has now been prescribed in Rule 133 of the Income-tax Rules 1962, vide notification no. 28/2023 dated 22nd May 2023. Guidelines have been issued by CBDT, clarifying various provisions in this regard.
CBDT has issued clarification on May 24, 2023 regarding provisions related to charitable and religious trusts in connection with failure to apply to registration, extension of due date for furnishing Form 10BD, applicability of provisional registration and denial of exemption for non-filing of Form 10B.
The CBIC has issued guidelines on May 04, 2023 for immediate implementation of concerted action on fake GST registrations. Highlights of the same are as follows:-
- A Special All-India Drive from 16th May 2023 to 15th July 2023 by all Central and State Tax administrations to detect fake GSTINs and carry out necessary remedial actions to remove such fake billers from the GST system.
- GSTN will identify fraudulent GSTINs based on data analytics for initiating verification drive and conducting necessary action subsequently.
- Appointment of Nodal Officer by each of the Zonal CGST Zone and State to ensure seamless flow of data and for coordination with GSTN/ DGARM and other Tax administrations.
- Concerned jurisdictional tax officer to undertake time bound exercise for verification of suspicious GSTINs based on the data received through Nodal Officer.
- An action taken report to be provided by each of the State as well as CGST Zones to GST Council Secretariat on weekly basis on the first working day after completion of the week in prescribed format. Any novel modus operandi detected during the verification/ investigation may also be indicated in the Action taken report.
- Formation of National Coordination Committee to monitor the progress of special drive. GST Council Secretariat to share the reports from various formations and make it available to the Committee.
Taxpayers were not allowed to report invoices older than 7 days from the date of reporting with a view to ensure timely compliance. Vide advisory dated May 06,2023 the GSTN has informed that it has been decided by the competent authority to defer the imposition of time limit of 7 days on reporting old e-invoices on the e-invoice IRP portals for taxpayers with aggregate turnover greater than or equal to 100 crores by three months.
As per the Press Release of Ministry of Finance dated May 11, 2023, the CBIC has rolled out an Automated Return Scrutiny Module for GST returns in the ACES-GST backend application for Central Tax Officers. This module will enable the officers to carry out scrutiny of GST returns of Centre Administered Taxpayers selected on the basis of data analytics and risks identified by the System. Implementation of this Automated Return Scrutiny Module has commenced with the scrutiny of GST returns for FY 2019-20, and the requisite data for the purpose has already been made available on the Tax officers’ dashboard.
A registered person is mandated to generate e-invoices through GST portal where turnover exceeds Rs. 10 Crore. The Government on the recommendations of the council, has reduced the turnover limit for e-invoicing applicability from 10 Cr. to 5 Cr vide notification dated May 10, 2023. The same shall be effective from August 01, 2023.
Quote of the day
"The unselfish effort to bring cheer to others will be the beginning of a happier life for ourselves."
- Helen Keller
Disclaimer: The contents of this Newsletter are only a summary and has not dealt with any issue in detail. Any action taken or proposed to be taken must be in consultation with professionals and not merely based on the articles / news updates. S. C. Sharada & Associates disclaims all liability on action taken without professional advice.