Mandatory Firm Rotation
Triggering a consolidation in the audit business
What was expected to create transparency in auditing seems to have triggered a consolidation in the business, giving an edge to big multinational audit firms. The Companies Act, 2013, made it mandatory for all listed and certain classes of unlisted companies to change their audit firms after 10 years or more with effect from April 1, 2017. A survey of 1,594 NSE-listed companies by Prime Database shows that 167 of them changed their auditors this financial year. The number of NSE-listed clients of Indian-owned audit firms has dropped from 1,398 in 2015-16 to 1,193 in 2016-17. The number of NSE-listed clients of the top five multinational brands — those belonging to global networks such as Deloitte, EY, KPMG, Price Waterhouse and Grant Thornton — has grown from 420 in FY 2014-15 to 467 in 2016-17. “We are seeing the beginning of a consolidation in the audit business,” says Pranav Haldea, managing director of PRIME Database.
Ind-AS (Indian accounting standard)
Getting round the new standards
Extensively using carve-outs, which is creating subsidiaries and then going in for IPOs, and exemptions have been hobbling the IFRS-compliant new Indian Accounting Standards (Ind-AS), which kicked in from April 1, 2016. It helped that Sebi, the stock market regulator, allowed reporting standalone financial results instead of consolidated results.
Around 1,000-odd companies with net worth of Rs 500 crore or above were covered in the first phase of Ind-AS implementation. Comprising 40 accounting standards, this entailed changes in the financial reporting framework. Revenue recognition, taxes and financial instruments were seen as the key impact areas to watch out for.
“The full impact of Ind-AS on financial performance, as well as on the financial position of corporate India, will be visible only when one gets the consolidated accounts for the full year with all the relevant disclosures,” said Sai Venkateshwaran, partner and head, accounting advisory services, KPMG.
Tax experts point out the impact of MAT on companies reporting under Ind-AS is still an open issue. There are also unresolved questions relating to distribution of dividend. This at a time when a large batch of unlisted companies – with net worth of Rs 250 crore or more – are set to join the transition bandwagon from April 1, 2017. Corporate India will have to keep a more close watch on its financial numbers by end of current fiscal.
Insolvency & Bankruptcy Code, 2016
Not yet a panacea for all ills
For the Insolvency & Bankruptcy Code, 2016, to be effective, there is the need for an ecosystem that will can take two-three years to be created, experts say. The Code, touted as a game-changer, can unlock non-performing assets worth around Rs 25,000 crore over the next five years, according to a recent joint study by Crisil and Assocham. The Crisil study notes large companies may continue to take legal recourse to delay recovery. “It would also mean that the code is unlikely to alleviate the current bad-loan problems soon,” the study said. Establishing a regulator, information utilities, insolvency professionals, laying out procedural modalities and increasing the number and strength of National Company Law Tribunals and Debt Recovery Tribunals will take time, the study added.
Real Estate (Regulation & Development) Act, 2016
The focus shifts to the states
Since the enactment of the real estate law, which mandates creating regulatory authorities, action has shifted to the states and union territories. Each has to establish a real estate regulatory authority within a year of the Act coming into force. Gujarat, Uttar Pradesh, Madhya Pradesh, Karnataka and Maharashtra have taken the lead in this direction. In March Parliament passed the Real Estate (Regulation & Development) Act, 2016 (RERA, 2016), which lays down the ground rules for real estate buying and selling in the country. Subsequently, sixty nine sections of the Act were notified by the Ministry of Housing & Urban Poverty Alleviation to bring the Act into force with effect from May 1st, 2016.
Registering every real estate project has been made mandatory. Developers have to upload details of every project on the RERA website. The central law stipulates that 70 per cent of the advance collected from the buyers need to be maintained in a bank account, and used only for constructing the project concerned. The real estate appellate tribunal will settle disputes within a specified time frame.
Even though the objective of the regulation is to bring more transparency and accountability in the real estate sector, experts point out that systems have to be put place for single-window clearance for developers to improve the overall compliance level. 2017 will be the year of reckoning for the Act.
The Benami Transaction (Prohibition) Amendment Act, 2016
Creating a deterrence for black money hoarders
The government started the war against black money a week before demonetisation by notifying the provisions of The Benami Transaction (Prohibition) Amendment Act, 2016, from November 1. The Act made amendments to the 28-year-old Benami Transactions Act, 1988. The 1988 legislation remained on the statute books without any rules framed against it. After the amendment, the Act now defines ‘benami property’ and what constitutes a ‘benami transaction’. The term ‘property’ covers movable, immovable, tangible and intangible properties. It provides for the confiscation of benami properties without compensation, imprisonment of up to seven years and a fine of up to 25 per cent of the fair value of the asset. While it is early days to comment on the efficacy of the Act in curbing the generation of benami properties, experts say the provisions are likely to deter the diversion of black money into benami properties.
International Arbitration pangs
Questions remain over enforceability
Corporate India cut a sorry figure in two multi-jurisdictional legal battles that hogged the headlines in 2016. One of them relates to the dispute between the Tata group and its erstwhile telecom partner, NTT Docomo, while the other is the fight between Devas Multimedia and Antrix, the commercial arm of the Indian Space Research Organisation (Isro). In both these cases the international arbitration awards went against the Indian companies.
Docomo has moved the Delhi high court to enforce an arbitration award of $1.17 billion that Tata group is required to pay its Japanese partner for its stake in Tata Teleservices. The Tata group has cited government rules for its inability to honour payments under pre-decided terms of agreement between the two parties. However, this case has raised larger questions on the enforcing international arbitration awards in India.
Similarly, in July this year the Permanent Court of Arbitration at Hague ruled against the Indian government over cancelling a contract between Devas Multimedia and Antrix. In 2015, an International Chamber of Commerce tribunal found that Antrix’s cancellation of the contract was unlawful and awarded Devas damages and pre-award interest to the tune of $672 million.
Revision of tax treaties
A case of door half shut
India in 2016 renegotiated two long-standing tax treaties – one each with Mauritius and Cyprus. And, negotiations for the India-Singapore tax treaty are in their final stages. These effectively shut the door on tax treaty abuse, including through treaty shopping and round-tripping. Finance Minister Arun Jaitley recently said at a public event that Mauritius, Cyprus and Singapore had become common routes for round-tripping; local money is taken out of India and then brought back through these routes to avoid taxes. Tax treaties like these provided investors an exemption from tax on capital gains, making routing of investments an attractive proposition. Tax experts say renegotiated treaties will ensure a greater flow of information related to tax and investment among partner countries. However, to be truly effective, these treaties will have to align with one another, says Rakesh Nangia, managing partner, Nagia & Co.
These developments come at a time when compliance to the Foreign Account Tax Compliance Act (Fatca) and Common Reporting Standards (CRS) requires more transparency in sharing of income- and tax-related information. Tax experts say investors might in 2017 need to rework their investment structures in line with the provisions of the new treaties. What impact these new treaties would have on investment flows into the country would be keenly watched next year.
‘Ease of Doing Business’ ranking
Still a pipe dream
In India, it takes 241 hours a year to prepare, file and pay taxes. This figure for high-income countries, according to the World Bank’s latest Doing Business report, stands at 163 hours. It does not come as a surprise that India is ranked 172nd among 190 countries – the same rank as in the previous edition of the report – when it comes to paying taxes.
Ranked 130th overall in ease of doing business, India did not see the needle moving much in 2017. The country had stood 131st in the previous edition of the report. In terms of starting a business, India dropped from 151st in 2016 to 155th in the 2017, despite the government’s focus on revving up the start-up economy. The country continues to lag in dealing with construction permits, a count on which it is ranked 185th this year, a notch lower than in 2016. The enactment of the Insolvency & Bankruptcy Code, 2016, does not get reflected in India’s rank in resolving insolvency (136th in 2017, against 135th in 2016).
Stung by the lack of progress in India’s ‘Ease of Doing Business’ ranking, the government has unveiled an eight-pronged strategy to facilitate ease of doing business in the country. The government’s plan to propel India among the top 50 countries in ease of doing business by 2018 looks like a pipe dream as of now.