The spread of pandemic COVID-19 has left the entire world grappling with its negative impact on the socioeconomic front. With most of the countries steadily going into lockdown, the businesses across the globe have taken or started taking a hit.
The outbreak has far-reaching consequences on the businesses – disruption of supply chain management, piling up of inventory, a mounting number of accounts receivables and payables, cash management issues, defaults in honoring debt servicing obligations, just to name a few. Such matters have forced the businesses to take unpopular decisions of downsizing, initiating pay cuts, discontinuance of product lines, operations, etc.
Handling these challenging times may require the organizations to adopt proactive realignment/ restructuring/curative measures. Here, we have tried to cover how can the tax function at the organization manage its functions and assist businesses in these challenging times.
As is rightly said, extraordinary times call for innovative thinking and extraordinary solutions. Instead of halting operations in the lockdown, corporates can use technology effectively to ensure the smooth functioning of business operations as well as compliances. We have tried to capture a few aspects of how corporates can manage tax and compliance function.
Managing withholding Tax Compliances (Local and Foreign Remittance)
- The Indian Government has not extended the due date for depositing withholding taxes but merely granted a relaxation in payment of interest by reducing the interest rates from 12%-18% to 9%. It is thus imperative for the companies to ensure that taxes are deposited within the prescribed time and manage the compliances in order to avoid interest costs in such challenging times;
- Companies can look at using various automated tools, which help in working on data remotely and also helps in managing compliances.
- In respect of Foreign Remittances, Nexdigm has also developed a web-based, automated tool that is hosted on a secure cloud server. The entire process of foreign remittances can be done online through this tool without any need for physical presence in the office.
Managing Tax Assessments
Not only the business houses, but even the revenue authorities have shifted from the usual assessment procedure to digital platforms. New applications are developed to bring a paradigm shift in taxation by promoting faceless assessment. It ensures the ease of compliance, transparency, efficiency, and expeditious disposal of cases.
With the outbreak of COVID-19, the Indian Judiciary has also shifted to digital modes of hearing like:
- Supreme court had announced hearing of urgent cases via video conferencing;
- The appellate tribunals accepted adjournments over e-mails;
- The revenue officers are also working from home.
In such an environment, it becomes a task for the corporates to be compliant with the notices issued by the tax department. Given that entities no longer work from their office arena, software applications that maintain tax documents and litigation trackers would prove to be a knight in the shining armor. It is also important to evaluate whether it’s possible to fast track pending litigations at various forums where significant relief is possible, leading to the release of tax demand that was paid.
Optimizing Tax cash flows
It is imperative that the tax function re-evaluates various tax positions of the company in order to optimize the tax costs and improve after-tax profits. It may be noted that tax positions taken earlier with certain assumptions may not hold good in light of changing circumstances.
It would also be worthwhile to look at pending refund claims with tax authorities and rigorously follow up for the same since such cash refunds would come in handy in these times. Similarly, it is critical to relook and revise the revenue and profitability projections for the upcoming financial year and see whether it make sense to apply for a lower/nil withholding tax certificate to maximize the cash flow to the organization again.
Lastly, it is important for the tax function to analyze what could be extraordinary expenses/claims that could arise on account of the pandemic and whether the same could be allowed for a tax deduction. For example, there could be write-offs of inventory, debtors, or even investments, and one has to conduct proper research on tax-deductibility of such expenses as well as create the robust backup documentation for the same.
Goods and Services Tax
Communication with vendors for timely filing of GSTR-1
- The government has granted significant relaxations in the filing of GSTR-3B and payment of GST liability (especially for businesses with a turnover of up to INR 50 million).
- In this backdrop, large businesses should communicate with their vendors to ensure that they file their GSTR-1 in time.
- This would ensure that input tax credit (ITC) of such large businesses is not blocked due to non-appearance of invoices in GSTR-2A, and they can continue to file their returns without further blockage of working capital in times of already contracted business.
Utilization of lockdown to expedite GST audits based on historical data
- The continuous cycle of GST returns means businesses have always found it difficult to allocate sufficient time for GST annual return and audit-related work during the normal course of business.
- Given the virtual shut down of most businesses, and therefore minimal complications in relation to regular GST compliances, this period can be utilized to expedite the GST annual return and GST audit of the financial year 2018-19, which essentially relies on historical data.
Utilization of lockdown to rectify long-standing mismatches with GSTR-2A
- There can be some items in the purchase register of a business that have not appeared in GSTR-2A for a considerable period of time.
- The businesses may look to identify such items and coordinate with the vendors to understand the reason for a mismatch and further rectify it. This can be easily done in case of vendors that have implemented ‘Work from Home’ in their organization.
Monitoring of GST refund claims and other rebates/drawbacks etc.
- Export-oriented businesses should closely monitor the status of their refund, drawbacks and other similar claims, which may be subject to delays given that the lockdown has impacted the government departments too.
- Early identification of potential delays can help businesses in undertaking timely mitigation measures to meet the working capital requirements in these tough times.
Customs duty
Re-scheduling of imports and exports
- The government has announced that the Customs clearance will continue 24/7. However, there may be practical difficulties with transportation from Customs port to warehouse/factory and other logistical factors.
- Businesses may be well-advised to monitor these challenges closely and re-schedule import and export shipments wherever possible, to minimize warehousing and transport costs, etc.
Transfer Pricing
The pandemic has thrown an additional challenge to MNCs - reconsidering the reasonability of the pricing strategies being adopted for intercompany transactions.
Transfer pricing is an economics and functional analysis based study. There could be a need to re-examine the transfer pricing models in case if there is any change or re-allocation of the functions performed or risk assumed within the group. Further, a detailed industrial analysis reflecting the impact of this pandemic on the industry, in general, is indispensable.
A few important considerations for corporates from a transfer pricing standpoint could be –
For a captive (Software development/IT-enabled services) services provider, having cost plus mark-up remuneration model, it would be important to factor the impact on operations/profitability at the group level while re-negotiating the mark-up rate with the parent entity (service recipient). The analysis of the impact will have to be well documented to justify any reduced mark-up rate and the factors considered while re-negotiation.
Similarly, taxpayers who are using profit-based methods to justify their intra-group transactions also need to carefully analyze the financial statements of comparable companies to assess how they are impacted due to COVID-19 while making economic adjustments.
Advance Pricing Agreement (APA) program has been highly successful in India, since its introduction. Considering the impact that COVID-19 has had on the businesses across the world, it is very likely that the corporates would have to re-negotiate the intra-group pricing policy, despite an APA in place. It is pertinent to note that the Indian APA program has necessary provisions to enable both tax authorities as well as taxpayers, to re-negotiate the APA terms. It will not be surprising if we see taxpayer (already having entered into APA) in large numbers approaching the authority with a request to renegotiate the APA terms to reflect the commercial reality and the impact of COVID-19.
Managing associates and team
There is no denying from the fact that the lock-down may create a slowdown in overall business activity. This time could be utilized by tax heads/managers to connect with the team through various initiatives:
- Professional training for the team
- Group and team bonding activity – ensuring continuous communication with the team in these times and motivating the team to perform at full strength.
- Brainstorming with the team on streamlining the process and ensuring compliances are managed on a timely basis.
While the Indian Government has done whatever it could in terms of providing liquidity and relief wherever possible, now it is up to the corporates to overcome these challenging times and emerge stronger. This crisis once again reiterates the fact that more and more businesses would have to look at digitally transforming every function of their business so that disruptions like COVID-19 do not impact the business significantly.