Newsletter Issue No 7-15th July 2012 - PKF Sridhar & Santhanam

Voice of Change 

Confidential and for private use of PKF S&S and MCR staff only 

PKF SRIDHAR & SANTHANAM 

Chartered Accountants 

ISSUE 7, 2012 

Insights into Revised Schedule VI 

GAAR: Indian Perspective 

CA.J.Ramnarayan 

BAT Galore 

Ms.Mahera Chauhan 

“The views expressed herein are those of the 

authors of the article and do not represent the 

views of the firm. This Newsletter is mainly for 

educating the staff. 

Birthday Bash!!!! 

Lessons for Life 

Known and Unknown facts!!!! 

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PKF 

SRIDHAR & SANTHANAM 

Chartered 

Accountantsccountants 

Insights into Revised Schedule VI 

CA.J. Ramnarayanan 

Now all the listed companies’ 

statutory audits are over, it is 

time for small and medium 

companies’ audits to be taken 

up. 

Unlike big companies, in small 

and medium companies, the role 

of auditor in guiding the finance 

department and the management 

on revised schedule VI is much 

more. Through this article, I 

would like to share with you 

certain basic things on revised 

schedule VI which should be 

taken care at the time of 

finalising presentation of 

accounts. 

Accounting Standards prevail 

over Revised Schedule VI 

Wherever there is conflict in 

presentation requirements 

between Accounting Standards 

and the Revised Schedule VI, 

the requirements of the 

Accounting Standard would 

always prevail. Classic example 

is Cash & Cash equivalents. 

While there is no differentiation 

between cash equivalents (short 

term highly liquid investments 

generally of upto 3 months 

maturity readily convertible into 

known amount of cash) and 

others in revised schedule VI, AS 

3 Cash flow Statements require 

the same to be bifurcated and 

shown separately. ICAI GN 

suggests Cash and Bank 

balances as the overall heading 

in BS under which Cash and 

cash equivalents may be listed. 

Classification between current 

and non-current 

Though the revised schedule VI 

gives the definition of what is 

current and non-current, many 

times there will always be doubt 

on whether to classify a 

particular asset/liability as current 

or non-current. To overcome this 

situation, we shall keep a simple 

thumb rule. In the case of assets, 

we shall go by expectation and 

in the case of liability, we shall go 

by right to defer settlement. 

This has been further illustrated 

in the ICAI’s FAQ on revised 

schedule VI in Questions 27 & 

28. 

What will come under Trade 

Payables 

Though Ministry of Corporate 

Affairs (MCA) had come out with 

definition of trade payables, 

many times there is doubt in our 

mind on whether amount due to 

employees should be treated as 

trade payables as it is in the 

nature of services rendered. To 

resolve this doubt, ICAI has 

clearly spelt out that as dues to 

employees are in the nature of 

contractual obligations under 

employer - employee 

relationship, the same need not 

be considered as part of trade 

payables through FAQ no.9 on 

revised schedule VI. 

Classification of long term 

employee benefits into current 

and non-current 

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As per Revised Schedule VI, 

even long term employee 

benefits like gratuity, pension, 

post-retirement medical benefit, 

etc. should also be bifurcated 

into current and non-current. To 

achieve this objective, we should 

take the help of actuaries and 

should insist for bifurcated 

amount to be mentioned in the 

actuarial valuation report itself. 

Presentation of taxes paid and 

provision made for taxation 

In pre-revised schedule VI era, 

people used to net-off cumulative 

taxes paid for different 

assessment years against the 

cumulative provision for tax 

made in the books and the 

resultant figure is either shown 

under current assets or current 

liabilities as the case may be. But 

under revised schedule VI, one 

has to bifurcate them as well into 

current and non-current. To 

facilitate the same, we should 

ask our clients to provide us with 

assessment year wise provisions 

made & taxes paid and should 

make the netting off assessment 

year-wise and present the 

assessment year-wise balances 

under non-current assets (unless 

say a refund order is received 

and receipt is expected) or 

current liabilities as the case may 

be. 

Capital Advances and Capital 

Work-in-progress 

Under revised schedule VI, one 

has to bifurcate between 

advances paid for projects till 

date and the work completed till 

date. To distinguish between 

advances and payments made 

against work completed till date, 

we have to review each & every 

contract at the time of audit as 

well as the nature of contract. 

For instance, all payments made 

in the case of turnkey contracts 

will have to be classified under 

capital advances only till the time 

of completion (i.e. capitalisation) 

of the project. 

Capital advances need to be 

disclosed as non-current assets 

even if they are received in Apr 

next. 

Classification of trade 

receivables based on due 

dates 

Another significant change made 

in revised schedule VI is the 

classification of trade receivables 

into less than & more than 6 

months based on due dates. 

Earlier it was based on the date 

of invoice. At the time of audit, 

one has to go through each and 

every sale order terms to identify 

the credit period offered and 

accordingly classify the trade 

receivables into less than 6 

months, more than 6 months and 

more than 12 months. For 

practical reasons you may also 

adopt for each uniform group of 

customers an average credit 

period, if there are numerous 

customers. 

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Other Operating Income and 

Other Income 

ICAI FAQ states that whether an 

item should be classified as 

“other operating revenue” or 

“other income” is a matter of 

judgment and requires 

consideration of specific facts. In 

a number of cases, the dividing 

line between these two items 

may be very blurred. It requires 

an exercise of significant 

judgment. Hence, at the time of 

audit, decision on classification 

of income should be taken based 

on the nature of business 

undertaken by the client and past 

business practices. 

Interest paid towards shortfall 

in advance tax payments & 

Wealth tax 

As per revised schedule VI, all 

such interest liabilities need to be 

classified under finance costs 

and not under current-tax or 

other expenses. Also wealth tax 

payable by the company has to 

be included now only under rates 

& taxes and not under current tax 

or any other head. 

Exceptional and Extra-ordinary 

items 

Also under revised schedule VI, 

one has to bifurcate and present 

exceptional and extra-ordinary 

items separately. Exceptional 

items are those items of income 

and expense within profit or loss 

from ordinary activities, are of 

such size, nature or incidence 

that their disclosure is relevant to 

explain the performance of the 

enterprise for the period. 

(Example: Huge Profit on Sale of 

fixed assets) Extra-ordinary 

items are income or expenses 

that arise from events or 

transactions that are clearly 

distinct from the ordinary 

activities of the enterprise and, 

therefore, are not expected to 

recur frequently or regularly. 

(Example: loss by earthquake 

/tsunami etc) One has to classify 

the items, at the time of audit, in 

the lines of the above definitions, 

and present accordingly in the 

financials. 

Disclaimer 

This article brings out only the 

major features of revised 

schedule VI which need to be 

taken care at the time of audit of 

small and medium enterprises. 

One should always refer to 

revised schedule VI issued by 

MCA and the guidance note & 

FAQ issued by ICAI at the time 

of audit to ensure compliance 

with all presentation 

requirements of revised schedule 

VI. 

Happy Auditing ☺ 

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GAAR: Indian Perspective 

Ms.Mahera Chauhan 

A constant debate has been 

raging over the issue of tax 

avoidance. Over the years, the 

term ‘tax avoidance’ has come 

to be understood as arranging 

affairs with the main object or 

purpose of obtaining tax 

advantage while prima facie 

fully intending to comply with 

the law in such respect 

Globally, tax avoidance has 

been recognized as an area of 

concern and several countries 

have expressed concern over 

tax evasion and avoidance. 

This is evident from the fact that 

either nations are legislating the 

doctrine of General Anti- 

Avoidance Regulations in their 

tax code or strengthening their 

existing code. 

The GAAR Mechanics: 

In India, the proposed Direct 

Tax Code 2010 (DTC 2010 or 

Code) seeks to address the 

issues relating to tax avoidance 

and evasion by bringing in 

General Anti-Avoidance Rules 

(GAAR) in addition to various 

transaction-specific Special 

Anti-Avoidance provisions. 

In a nutshell the whole GAAR 

scheme revolves around the 

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question of whether an 

arrangement qualifies as what 

is termed an ‘impermissible 

avoidance arrangement’. 

This term in turn comprises of 

two distinct components - the 

main purpose test and the 

specified conditions test. If 

upon application of the above 

tests, an arrangement qualifies 

as an ‘impermissible avoidance 

arrangement’, the Finance Bill 

proposes to empower the tax 

authorities with wide ranging 

powers to determine its 

consequences, including one or 

more of the six specified 

consequences appearing in the 

above chart. 

It has been introduced in India 

due to VODAFONE case ruling 

in favour of this company by the 

Supreme Court. The new rules 

were expected to come into 

effect from 01 April, 2012. 

The scope of the Indian GAAR 

is wide reaching as it seeks to 

cover within its ambit nearly all 

transactions and structures 

which have any element of tax 

planning imbedded. The 

justification for such an “all 

encompassing” provision 

probably lies in the fact that 

nations across the world take a 

conscious decision to 

implement GAAR in their 

statutes since it is not feasible 

for tax legislation to enact 

specific anti avoidance rules for 

all forms of tax avoidance 

transactions. 

Quick Facts about the proposed GAAR in India: 

— The General Anti 

entirely from the 

Avoidance Rule, or 

taxpayer and shift it to 

GAAR, was proposed 

the 

revenue 

in mid-March as part of 

departments. 

the budget for fiscal 

— A local or foreign 

2013. 

taxpayer will also be 

— GAAR aims to target 

able to approach 

tax evaders, partly by 

authorities in advance 

stopping Indian 

for a ruling on their 

companies and 

potential tax liabilities, 

investors from routing 

Mukherjee proposed. 

investments through 

— An independent 

Mauritius or other tax 

havens for the sole 

member would be in 

the GAAR approving 

purpose of avoiding 

panel, while one 

taxes. 

— Proposes to remove 

member would be an 

officer of the level of 

the onus of proof 

Joint Secretary, or 

above, from the 

Ministry of Law. 

— A committee would be 

constituted under the 

Chairmanship of the 

Director General of 

Income Tax, with the 

task of providing 

recommendations by 

May 31 for formulating 

the rules and guidelines 

to implement GAAR 

provisions. 

— On the proposed 

retrospective 

amendment in tax 

rules, Mukherjee said 

the changes will not 

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— Override the provisions 

of 

double-tax 

avoidance treaties India 

has with 82 countries. 

— The proposed 

retrospective changes 

in tax rules will not be 

used to reopen cases 

where assessment 

orders have already 

been finalised. 

— Ministry of Finance 

proposes to reduce 

The Countdown begins… 

India will delay introduction of 

GAAR by one year until fiscal 

2013/14. Finance Minister also 

told Parliament that the burden 

of proving tax evasion will lie 

with the authorities rather than 

with overseas investors. 

Over the past few weeks, there 

has been a lot of discussion on 

general anti-avoidance rule 

(GAAR) that has been 

proposed in the recent Union 

budget. 

Taxpayers, domestic and 

foreign, will witness a paradigm 

shift in the empowerment and 

approach of tax authorities in 

India towards taxation of 

— long-term capital gains 

tax on private equity 

firms on the sale of 

unlisted securities to 

10%, from 20% 

currently, and bring the 

tax rate in line with 

what is charged from 

foreign portfolio 

investors. 

— Also, proposed to cut 

the withholding tax to 

5% from 20% currently 

transactions, structures and 

arrangements. 

The introduction of GAAR will 

legislatively empower the tax 

authorities to intervene in 

circumstances where they 

allege that the primary motive 

of a particular transaction or 

arrangement is to obtain a tax 

advantage. 

More importantly, the onus is 

on the tax payer to prove that 

the transaction was not driven 

by tax consideration. 

GAAR is aimed at curbing tax 

avoidance by say, structuring a 

business or effecting a 

transaction so as to minimise 

the liability. A shining example 

— on funding through 

foreign loans for "all 

businesses." 

— The Finance Minister 

proposed to extend the 

tax exemption on longterm 

capital gains 

related to the sale of 

unlisted securities in an 

initial public offering. 

The levy of the 

Securities Transaction 

Tax would be levied at 

the rate of 0.2% on the 

sales of unlisted 

securities. 

would be the creation of a shellholding 

company in a taxfriendly 

country like Mauritius to 

invest in India. GAAR 

empowers tax authorities to 

separate transactions aimed at 

avoiding tax from the ones 

driven by commercial 

consideration. 

As of March 16, 2012, FIIs had 

assets under custody of more 

than 10 trillion (over $200 

billion), representing 17% of the 

capitalisation of Indian 

securities markets, or as much 

as 40% of the free-float on the 

Indian exchanges. 

India's economic success story 

is one factor that draws global 

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capital to its shores. Ease of 

market access and a 

transparent and predictable tax 

system is another. The tax 

uncertainty now anticipated 

creates significant risk that 

these global funds will choose 

to avoid the Indian capital 

markets altogether and redirect 

their resources to other 

opportunities. 

The government says the move 

is not aimed at maximising tax 

revenues but plugging tax 

leakages. 

Conclusion 

As taxpayers and investors 

gear up to meet the GAAR 

challenge post 2012, they look 

forward to gaining some 

administrative guidance being 

issued providing safe harbour 

for invocation of GAAR, as well 

as providing for standards of 

documentation which may be 

required to be maintained by 

taxpayers and investors. 

It is hoped that tax authorities 

will refrain from indulging in 

misuse the power provided 

under this provision. Experts 

recommended that the 

Government should adopt the 

best international practices to 

combat misuse of the 

provisions of GAAR by tax 

authorities particularly on 

burden of proof which presently 

is on the tax payer. 

One such suggestion could be 

the setting up of a high level 

Committee which needs to 

approve 

each 

transaction/structure in which 

GAAR is proposed to be 

invoked, as has been done in 

Canada. 

The success of GAAR lies in its 

judicious, selective and 

sensible implementation. In the 

Indian context, considering the 

aggression of the of tax 

administration the introduction 

of GAAR may be worrisome to 

the tax payers and investors 

unless implemented in the 

balanced manner with 

adequate safeguards for 

protecting the taxpaying 

community. 

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Congratulations to Prakasam for handling a special audit extraordinarily well. 

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Birthday Bash!!!! 

Name DOB Place 

Sukanya Thyagarajan 19-Jul Bangalore 

Bindiya Sanjay Makhija 22-Jul Hyderabad 

Nidhi Bharti 23-Jul Mumbai 

Meghana Purohit 24-Jul Bangalore 

Divya B 25-Jul Chennai 

Prakasam.P 26-Jul Chennai 

Ali Asgar Bohra 28-Jul Mumbai 

Perla Sudheer 29-Jul Bangalore 

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Lessons for Life 

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Known and Unknown FACTS!!!!! 

How many of these do you know 

1. MOPED is the short term for 'Motorized Pedaling'. 

2. POP MUSIC is 'Popular Music' shortened. 

3. BUS is the short term for 'Omnibus' that means everybody. 

4. FORTNIGHT comes from 'Fourteen Nights' (Two Weeks). 

5. DRAWING ROOM was actually a 'withdrawing room' where people withdrew after Dinner. Later 

the prefix 'with' was dropped.. 

6. AG-MARK, which some products bear, stems from 'Agricultural Marketing'. 

7. JOURNAL is a diary that tells about 'Journey for a day' during each Day's business. 

8. TIPS come from 'To Insure Prompt Service'. In olden days to get Prompt service from servants in 

an inn, travellers used to drop coins in a Box on which was written 'To Insure Prompt Service'. This 

gave rise to the custom of Tips. 

9. JEEP is a vehicle with unique Gear system. It was invented during World War II (1939-1945). It 

was named 'General Purpose Vehicle (GP)'.GP was changed into JEEP later. 

10. Coca-Cola was originally green. 

11. The name of all the continents end with the same letter that they start with. 

12. The strongest muscle in the body is the tongue. 

13. TYPEWRITER is the longest word that can be made using the letters only on one row 1 of the 

keyboard. 

14. You can't kill yourself by holding your breath. 

15. People say "Bless you" when you sneeze because when you sneeze, your heart stops for a 

millisecond. 

16. The "sixth sick sheik's sixth sheep's sick" is said to be the toughest tongue twister in the 

English language. 

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17. If you sneeze too hard, you can fracture a rib. If you try to suppress a sneeze, you can rupture a 

blood vessel in your head or neck and die. 

18. What do bullet proof vests, fire escapes, windshield wipers and laser printers all have in common 

Ans. - All invented by women. 

19. A snail can sleep for three years. 

20. On average, people fear spiders more than they do death. 

21. Shakespeare invented the word 'assassination' and 'bump'. 

22. The ant always falls over on its right side when intoxicated. 

23. Rats multiply so quickly that in 18 months, two rats could have over million descendants. 

24. Wearing headphones for just an hour will increase the bacteria in your ear by 700 times. 

25. Like fingerprints, everyone's tongue print is different. 

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The Editorial Committee: 

Chief Editor 

• S Ramakrishnan 

The Team 

• Janani Vijayakumar 

• Mahera Chauhan 

• Harini Vijayakumar 

• Nithya Rajagopalan 

• Charanya Sathyamoorthy 

• Vinayasree Menon 

• Priyanka Pattabiraman 

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Newsletter Issue No 7-15th July 2012 - PKF Sridhar & Santhanam

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