EY Tax Alert CBDT notifies additional scope of reporting in Tax Audit Report
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25 July 2018
EY Tax Alert
CBDT notifies additional
scope of reporting in Tax
Audit Report
Tax Alerts cover significant tax Executive summary
news, developments and changes
The Indian Tax Laws (ITL)[1] require specified taxpayers carrying on business or profession
in legislation that affect Indian to get their accounts audited by an accountant[2] . The accountant has to furnish a Tax
businesses. They act as technical Audit Report (TAR) in Form No. 3CD by uploading it in electronic form prior to the taxpayer
summaries to keep you on top of filing return of income for each tax year (TY) by the specified due date. The TAR includes
several items which are relevant for computation of taxable income, as also for reporting
the latest tax issues. For more of various tax compliances made by the taxpayer.
information, please contact your The Central Board of Direct Taxes (CBDT)[3] has issued Notification No. 33/2018 dated 20
Ernst & Young advisor. July 2018 (Notification) modifying and/or enhancing the disclosure/reporting
requirements in the TAR for TY 2017-18 onwards.
The modifications are effective from 20 August 2018.
[1]
Income-tax Act, 1961 and Income-tax Rules, 1962
[2]
The meaning of the term ”accountant” is defined under the ITL and mainly includes a practicing Chartered
Accountant who fulfills certain independence requirements
[3]
Apex body for administration of direct taxes in IndiaPage 2
The key amendments in the Notification for the purpose of
reporting in the TAR includes transactions on gift taxation, CBDT notifies additional
secondary adjustment under transfer pricing provisions,
disallowance of interest deduction under the new interest
scope of reporting in Tax
deduction limitation rule as per BEPS[4] Action 4, General
Anti-avoidance Rule (GAAR)-impacted transactions, deemed
Audit Report
dividend taxation, certain Specified Financial Transactions
(SFT) and compliance under the Foreign Account Tax
Compliance Act (FATCA), compliance of provisions of
Country-by- Country Reporting (CbCr), details relating to
Background
Goods and Service Tax (GST).
The Indian Tax Laws (ITL) [5] require specified taxpayers
carrying on business or profession to get their accounts
The amended TAR significantly enhances reporting
audited by an Accountant [6]. The Accountant has to
obligation for taxpayers and Accountants and is likely to
furnish a Tax Audit Report (TAR) in Form No. 3CD by
raise several practical challenges.
uploading it in electronic form prior to taxpayer filing
return of income for each Tax Year (TY) by specified due
It would be reasonable to expect the Institute of Chartered date. The TAR includes several items which are relevant
Accountants of India (ICAI) to issue additional guidance to its for computation of taxable income as also reporting of
members for discharging their attest function in relation to various tax compliances made by the taxpayers.
amended TAR.
The Central Board of Direct Taxes (CBDT) [7] has issued
While some of the reporting requirements relate to Notification No. 33 /2018 dated 20 July 2018
disclosure of facts (like dates of various tax compliances (Notification) modifying and/or enhancing the disclosure /
made by the taxpayer or GST data), others are subjective in reporting requirements in TAR for tax year 2017-18
nature and will require significant exercise of judgement on onwards.
part of the taxpayer and Accountant. For instance, reporting
whether taxpayer has entered into impermissible avoidance
The modifications are effective from 20 August 2018.
arrangement and if yes, to report the amount of tax benefit
to all the parties to the arrangement is likely to place
onerous burden on both taxpayer and the Accountant. The This Tax Alert summarizes the key amendments made by
guidance to be provided by ICAI will assume significance in the Notification.
this regard.
Key changes in TAR:
Both taxpayers and Accountants will need to critically
evaluate the applicability of enhanced reporting 1) Reporting of receipt of forfeited advance for
requirements. transfer of capital asset [New clause 29A]
The effective date of amended TAR is 20 August 2018. Finance Act (FA 2014) inserted a provision for
Hence, it appears TARs furnished prior to 20 August 2018 taxation of sum of money received as advance or in
need not include enhanced reporting requirements. the course of negotiations for transfer of capital
asset if such amount is forfeited and the transfer of
capital asset does not take place. The amended TAR
requires the Accountant to certify whether the
taxpayer has received any such income and if yes,
the nature and amount of such income.
[5]
Income-tax Act, 1961 and Income tax Rules, 1962
[6]
The meaning of the term ‘Accountant’ is defined under the ITL and
[4] mainly includes a practicing Chartered Accountant who fulfills certain
Base Erosion and Profit Shifting
independence requirements
[7]
Apex body for administration of direct taxes in IndiaPage 3
2) Reporting of gift taxation [New clause 29B] 4) Disclosure of disallowance of interest deduction
under new interest deduction limitation rule as per
Finance Act (FA) 2017 significantly expanded scope of BEPS[11] Action 4 [New clause 30B]
gift taxation provision which taxes receipt of sum of
money or other specified properties[8] by a taxpayer Pursuant to BEPS Action 4 recommended by
without consideration or for inadequate consideration OECD[12] , FA 2017 inserted a new provision which
(subject to certain exceptions[9]). The amended TAR limits interest deduction or similar payments made
has new clause 29B which requires accountant to by Indian company or permanent establishment of
certify whether the taxpayer has received any such foreign company for debt borrowed from Non-
income and if yes, the nature and amount of such resident (NR) AE or guaranteed by AE. The provision
income. applies only if interest or similar payments on
specified borrowings exceeds.
3) Secondary Adjustment (SA) [New clause 30A]:
INR10M in which case, interest deduction is limited
FA 2017 introduced SA provisions in the ITL which to lower of actual expenditure in favor of AE or 30%
trigger in a case where there is a primary transfer of EBIDTA[13]. The amended TAR has a new clause
Pricing Adjustment (PA) under any of the following 30B which requires the Accountant to certify the
five scenarios: details of expenditure incurred by way of interest or
similar nature, EBIDTA of the TY for which TAR is
i. Voluntary transfer pricing adjustment made by furnished, the quantum of interest expenditure or
the taxpayer similar nature which exceeds 30%of EBDITA and
unclaimed interest expenditure eligible for carry
ii. Adjustment made by Tax Authority and accepted
forward to subsequent TY and which has been
by the taxpayer
brought forward from prior TYs.
iii. Determination by Advance Pricing Agreement
iv. Determination pursuant to Safe Harbour Rules
5) Reporting of General Anti Avoidance Rule (GAAR)
v. Resolution under Mutual Agreement Procedure
impacted transactions [New clause 30C]:
methodology
GAAR provisions were introduced in the ITL effective
In terms of SA provisions, in a case where due to a PA
from 1 April 2017 to deal with aggressive tax
in the hands of the taxpayer, there results an excess planning. In past, Shome Committee[14] in its first
cash with taxpayer’s associated enterprise (AE) report had recommended to amend TAR to include
outside India then such excess cash is required to be
reporting by the Accountant of impermissible tax
repatriated to India within the prescribed time
avoidance arrangements. Shome Committee
limits[10]. In a case where the excess money is not
recommended to include reporting of those
repatriated to India within the prescribed time, then arrangements which are considered by the
such amount is deemed to be an advance made by the Accountant as “more likely than not” to be held as
taxpayer to its AE and interest is levied on the deemed
impermissible avoidance agreement.
advance, in a prescribed manner, until it is repatriated
to India.
The amended TAR requires to report whether the
taxpayer has entered into an impermissible
The amended TAR requires disclosures relating to SA avoidance arrangement. If yes, it further requires to
provisions which includes: report the nature of such impermissible avoidance
arrangement and the amount of tax benefit in the
•Whether there has been a PA during the relevant tax year arising, in aggregate, to all the parties to
tax year? the arrangement.
•Category of PA made
•Amount of PA
•Whether the excess money available is required to
be repatriated to India and if yes, whether the
excess money has been repatriated to India within
the prescribed time limit?
•If the excess money is not repatriated to India
within the prescribed time, amount of imputed
interest on such deemed advance
[8]
Like immovable property, shares, securities, jewellery etc.
[11]
[9] Base Erosion and Profit Shifting
For instance, receipts from relatives or receipts under tax exempt
[12]
business reorganisations Organisation for Economic Co-operation and Development
[10] [13]
The ITL, under relevant rules, prescribes time limit for repatriation of Earnings before interest depreciation, tax and amortization ike
excess money and the manner of computation of interest on deemed immovable property, shares, securities, jewellery etc.
advance. Refer our alert titled “India Tax authority issues rules for [14]
A Committee constituted by CBDT headed by Dr. Parthasarathy Shome
implementing secondary transfer pricing adjustment provision” dated 21 to give recommendations on GAAR provisions
June 2017.Page 4
6) Receipt of cash in excess of INR2 lacs [New clause 9) Reporting requirement for certain Specified
31(ba)/(bb)/(bc)/bd)]: Financial Transactions (SFT) and compliance under
Foreign Account Tax Compliance Act (FATCA)
To discourage cash transactions and move to [New clause 42]
“cashless” economy, FA 2017 inserted a provision in
ITL to prohibit taxpayers (barring certain ►Statement of SFT
exceptions[15]) from receiving an amount in excess of
INR 2 lacs otherwise than by an account payee cheque The ITL make it obligatory for taxpayers (reporting
or an account payee bank draft or use of electronic entity) to furnish details of SFTs[17 ] and the parties
clearing system through a bank account. The with whom such transactions were entered (with
amended TAR requires disclosure of transactions their PAN) [18 ] . The reporting entity is required to
which do not comply with this requirement. submit details in a prescribed form (i.e. Form No.
61A[19] ). Similar reporting requirement exists in
7) Enhanced reporting of Statement of Tax Deducted or Form 61[20] for a separate list of PAN reportable
Collected at Source (TDS statement) [Clause 34(b)]: transactions[21] where counter party to the taxpayer
does not possess PAN.
Prior to amendment, the TAR required disclosure of
transactional details of tax deduction or collected at ►FATCA and Common reporting Standard (CRS)
source and TDS statements filed in respect thereof. It
also required the Accountant to certify whether TDS With a view to collect required information to enable
statements are furnished to the Tax Authority within India to meet its obligation of automatic exchange of
prescribed time. In case TDS statements are not information under FATCA and CRS, the ITL require
furnished on time, it required further disclosure of prescribed financial institutions to furnish a
date when it was furnished (if furnished) and whether statement in Form No. 61B of ‘reportable accounts’
it contains information about all transactions which maintained by them. .
are required to be reported. In other words, the TAR
did not require disclosure of unreported transactions The amended TAR requires the Accountant to report
in TDS statements if they were furnished within due whether the taxpayer is required to furnish Form No.
date. The disclosure of unreported transactions was 61 / 61A / 61B and if yes, the relevant details such
required only if TDS statements were not furnished as Taxpayer‘s identification number[22], due date of
within due date. furnishing respective forms, date of furnishing the
said form. More significantly, the amended TAR also
The amended TAR now requires disclosure of requires the Accountant to report whether
details/transactions which are not reported even in submitted forms contains all details or transactions
TDS statements which are furnished within due date. which were required to be reported and if not, list of
details / transactions which are not reported by
8) Deemed Dividend [New clause 36A]: taxpayer. In other words, the amended TAR requires
the Accountant to audit the submitted forms to
Under the ITL, any loan or advance given by a closely- identify unreported transactions.
held company (CHC) to its substantial shareholder or a
concern where such shareholder holds substantial
interest or any payment made by such CHC for benefit
of such shareholder is deemed to be “dividend” to the
extent of accumulated profits possessed by payer
company. Upto TY 2017-18, such payment triggered
taxation in the hands of the recipient shareholder[16].
The amended TAR has a new clause 36A which
requires the recipient of such dividend to report the
quantum of dividend received and date of such
receipt. Thus, the new reporting requirement applies
to the recipient of the dividend who is liable to tax [17 ]
There are 13 types of SFTs listed in Rule 114E with varying
audit and not to the dividend paying CHC. thresholds. On illustrative basis, these include cash deposits and
withdrawals from banks, fixed deposits with banks, credit card payments,
issue of bonds or debentures, buyback of shares, cash sales of goods or
services, etc.
[18]
Permanent Account Number
[19 ]
On or before 31 May immediately following the relevant Tax Year
[20 ]
Twice for one Tax Year - In relations to transactions entered prior to
30 September - due date is 31 October and in relation to transactions
entered from 1 October to 31 March – Due date is 30 April
[21]
[15]
Like Government, banks, etc. List of PAN reportable transactions are specified in Rule 114B.
[16 ]
Reporting in Form 61 triggers if the party required to report his PAN for
From TY 2018-19, such payment triggers a distribution tax @30% such transactions does not possess PAN
(plus applicable surcharge and cess) in the hands of dividend paying [22]
Income-tax Department Reporting Entity Identification Number
CHC.Page 5
10) Reporting of compliance of provisions of Country-by-
Country reporting (CbCr) [New clause 43(a)] Comments
To implement BEPS Action 13 (Transfer Pricing The amended TAR significantly enhances reporting
Documentation and Country-by-Country Reporting) obligation for taxpayers and Accountants and is likely
recommendations, FA 2016 amended the ITL to to raise several practical challenges.
introduce provisions for additional transfer pricing
(TP) documentation, consisting of: (i) a master file It would be reasonable to expect the Institute of
containing standardized information relevant for all Chartered Accountants of India (ICAI) to issue
members of a multinational group; and (ii) a Cbc additional guidance to its members for discharging
report containing certain information relating to the their attest function in relation to amended TAR.
global allocation of the group’s income and taxes,
together with indicators of the location of economic While some of the reporting requirements relate to
activity within the group (CbCR information). Further, disclosure of facts (like dates of various tax
rules along with the relevant forms for implementation compliances made by the taxpayer or GST data),
were issued on 31 October 2017. The first year for others are subjective in nature and will require
which CbCR became applicable was TY 2016-17 for significant exercise of judgement on part of the
which due date was 31 March 2018. taxpayer and Accountant. For instance, reporting
whether taxpayer has entered into impermissible
The amended TAR requires the Accountant to report avoidance arrangement and if yes, to report the
whether the taxpayer or its parent entity or alternate amount of tax benefit to all the parties to the
reporting entity is liable to furnish the CbCr and if yes, arrangement is likely to place onerous burden on both
particulars relating to furnishing of such report. taxpayer and the Accountant. The guidance to be
provided by ICAI will assume significance in this
Since the due date for furnishing TAR[23] precedes the regard.
due date for furnishing CbCR[24], it appears that
disclosure in TAR relates to CbCR compliance made Both taxpayers and Accountants will need to critically
for the preceding tax year. evaluate the applicability of enhanced reporting
requirements.
11) Details relating to Goods and Service tax (GST) [New
The effective date of amended TAR is 20 August
clause 44]:
2018. Hence, it appears TARs furnished prior to 20
August 2018 need not include enhanced reporting
Similar to the amendment made in income tax return requirements.
forms[25], the amended TAR requires reporting of
details of Goods and Services Tax (GST) viz. break-up
of total expenditure with GST registered and non-
registered entities. In relation to expenditure with GST
registered entities, it further requires the break-up of
expenditure relating to exempt supply covered under
the composition scheme and other registered entities.
[23]
30 September or 30 November immediately following the tax year
[24]
31 March immediately following the tax year
[25]
Refer our alert titled “CBDT notifies ITR Forms for tax year 2017-
18” dated 7 April 2018Page 6
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