The earlier
notification by SEBI introducing the framework for SEBI (Investment Advisors)
(Amendment) Regulations, 2020 dated 3 July 2020 left many questions unanswered
of the RIA’s which drew many speculations and interpretations. Our article has
been divided into six sections mentioned below:
Segregation at client level for distribution and advisory
Agreement between IA and the client (Considerations & Contents)
Fee to be charged by IA to the client
Registration as a Non-individual Investment Advisor
Maintenance of records & Audit
Risk profiling and display of
details on website
IMPORTANT
DATES TO CONSIDER
These guidelines
shall come into force from 30 September 2020. Further, timelines specific to
the regulations specified have been stated in the table below:
Implementation of the respective regulations
Before 01 April 2021
Before 01 January 2021
Client
level segregation between distribution and IA clients
Maintenance
of all the records of communications with client
Considerations
& Contents of Agreements
Risk
profiling and suitability
Fee to be
charged to the client
Display
of details on the website
Registration
as non-individual if more than 150 clients as on 30 September 2020
Other
due dates to be considered under the regulations
Particulars
Date (Comply before)
Submission
of the report on the agreement implementation
30 June
2021
Qualifications
& certification requirements
3 years
for existing IA’s
Reporting
of adverse finding in audit report with action taken from the FY 2020-21
audit
30 days
from audit report or 31 October whichever is earlier
Reporting
by Individual IA having more than 150 clients as on 30 Sep 2020 file report
with SEBI in required format
15 October
2020
Particulars
Points to consider in the Guidelines
Segregation at client level for
distribution and advisory
Important points to
note:
Where existing clients are provided both, distribution & IA
services, option to be given for continuing with any one service to clientDiscretion given to the clients to keep holding such assets prior to
such applicability of selection between advisory/ distributionPAN to be considered for keeping control of clients for such
segregation. Family of the client to be considered as a single control recordIA to advice only direct plans, wherever available (Emphasis
supplied)Additional
Compliance:
Obtain an annual declaration from the client for having the
information on dependent family membersObtain annual certificate from auditor/ statutory auditor for client
level segregation
Action points:
IA’s offering both distribution and IA services should segregate the
clients by giving them option and obtain relevant declaration
Agreement
between IA and the client (Considerations & Contents)
Important points to note:
Terms & Conditions have been specified for the purpose of
inclusion in the IA agreement with the clientNo advice to be provided or fee to be charged until the agreement is signed
with the client and copy delivered to the client.
Now a question in
this scenario arises whether digital modes of signing would be considered as
valid when it has been specified that the agreement to be signed and
delivered to the client.Answer: In our
view, the intent of this is to have the client agreed to the terms as stated
by the IA in the agreement and delivering a copy of the same to the clients
knowledge. The modes of acceptance of a valid contract/ agreement should include
the way of digital signing like by way of ‘digital signature’ and having an
email of the same delivered to the registered email ID. We have also seen
lately many Fintech driven companies follow the process of e-signatures
followed by OTP verification where the agreements are integrated and signed
with the phone number or AADHAR number linked phone number, which means that
the client has given his consent, which is also considered as a valid
agreement in certain situations. However, one needs to verify the process
before implementing the same whether the process would be considered as valid
in the eyes of law depending upon the stakes involved.
All these agreements have to be done and executed with the existing
clients by 01 April 2021.
Additional
Compliances:
A report
confirming that all the agreements have been done by the format and per the
requirements of the regulations of IA needs to be submitted to SEBI by 30
June 2021.
Action
points:
The IA
should identify the differences between the existing agreements and the
proposed agreement under the IA regulations and can either opt to enter into
a fresh agreement or make an addendum to the existing agreement, based on his
requirements. However, he will have to confirm that all the clauses required
have been covered and those clauses which are against the interest of the IA
regulations have been omitted.
Fee to
be charged by IA to the client
Important points to
note:
Two methods have been prescribedAUA mode – 2.5% of AUA maximum can be
charged per annum across all services. Assets pertaining to pre-existing
regime of distribution shall be deducted from AUA.Fixed fee – maximum fee that can be charged
under this shall not exceed INR 1.25 lac p.a.The fee pattern agreed shall
remain for 12 months from the date of onboardingIA may charge in advance, however it shall not accept advance fee for
more than 2 quarters.The mode selected in the above can differ from client to client
Additional
Compliances: None
Action points:
The existing fee model will have
to be reworked and the IA will have to revisit on its terms with the client.
Since the family of a client will have to be considered as a single client,
the terms will have to be reconsidered and a thorough diligence of the
existing model and the revised model will have to be done to understand which
model is beneficial between the two client-wise.
Registration
as a Non-individual Investment Advisor
Important points to note:
Limitation prescribed to have not more than 150 clients as an
individual IAAn IA having more than 150 clients as on 30 September 2020, shall Apply for non-individual license
in Form AApplication to be made by 01 April
2020Not onboard further clientsCan continue servicing the existing
clients
Additional
Compliance:
Where the
IA has more than 150 clients as on 30 September 2020, he/she shall file the
details in required format to SEBI by 15 October 2020
Action
points:
Where the
individual IA is nearing the count of 150 clients or has already onboarded
more than 150 clients, should apply for the license in Form A to sustain
continuity.
Maintenance
of records & Audit
Important points to note:
All records of communications with the client shall be preserved by
the IA, i.e. from first communication until the advisory services existThe records shall be preserved for 5 years or until such time till the
dispute, if any, is resolvedAnnual audit shall be conducted for ensuring compliance with the
regulation within 6 months from end of financial year
Additional
Compliances:
Report on adverse
findings, if any, along with action taken, shall be submitted to the SEBI
office within 1 month from audit report and not later than 31 October from
the report of FY 2020-21
Action points:
The IAs are expected
to review all their previous audit reports and set in place their controls
and requirements per the regulations to avoid any adverse observations by the
auditors. It is advisable that the interim audit is conducted to identify the
issues and address them before the final audit.
Risk
profiling and display of details on website
Important points to note:
For the purpose of risk profiling and suitability analysis of
non-individual clients, IA should document the investment policy approved by
such client’s board/ managementIn absence of the same, it should be to the discretion of the IA for
such onboardingIA shall display the relevant details provided in regulation on its
website and all communications
Additional
Compliance: None
Action
points:
The IA shall communicate to all the non-individual clients for their
management approved investment policyThe IA shall identify the standard formats of communication and also
on its website, the required details and make relevant edits thereto to
comply with the regulations
Indian e-commerce and DigiTech
industry have been grown to a new height in the past decade. We have seen
exponential rise in the way people look at business and the modus operandi of
managing a business. From high investments in space and layouts, people have
diverted to high investments and expenditure in technology and logistics. This
is the reason why logistics demand has also equally risen along with
e-commerce. From what we understand that in todays date, anyone can do business
and reach out to the end consumer from anywhere in the world. With this type of
structure since the economic presence is possible for a particular organisation
without having a physical presence in India, it became very important for the
revenue departments to tweak their provisions to get these e-commerce and
DigiTech giants under their purview. With that spirit, we have seen amendment
and changes coming in the Income-tax Act, 1961 and also in Goods & Service
tax Law in India.
Digital Technology (DigiTech)
Income tax
Equalisation levy on online advertisements on digital
platforms
Business may be
conducted in digital domain without regard to national boundaries. This may
dissolve the link between an income-producing activity and a specific location.
To tackle taxation issues in transaction conducted in cyber space, equalisation
levy was imposed. Equalisation levy had come in force from 1 June 2016 under
section 165 if Finance Act 2016. Equalisation levy is required to be charged at
the rate of 6 percent of the amount of consideration for specified services
received or receivable by a non-resident from a person resident in India,
if such amount paid/ payable is more than 1 lac in a particular previous year.
Specified services for this purpose mean online advertisement, any
provision for digital advertising space or any other facility or service for
the purpose of online advertisement and includes any other service as may be
notified by the Central Government in this behalf.
Where a person
resident in India who is carrying on business or profession in India avails the
specified services as mentioned above, then such person shall deduct
equalisation levy from the amount paid or payable to the non-resident in
respect of such specified services at 6 percent on such amount paid/
payable.
Example
The most common
example to consider in this situation is of payments made to Google &
Facebook for online advertisement where such payments are made to Foreign arm
of Google or Foreign arm of Facebook. Since these are purely considered as
advertisement in digital space and would be considered as online advertisement,
an Indian person carrying out business or profession in India and availing
these services of non-resident entities (Google & Facebook) would result to
deduction of equalisation levy of 6 percent.
Grossing up
Now the most
important part in this entire scenario which most of the Indian businesses face
is that such platforms which facilitate online advertisement, take such amounts
in advance and the entire amount is debited by registering your cards/ wallets
online. These platforms do not allow lower payments and therefore deduction and
payment to these platforms becomes almost impossible. In that scenario it has
been categorically stated that where in case the payer has not deducted/ failed
to deduct such levy from the amount paid/ payable, yet the amount is liable to
be paid. In such situation, the amount will have to be grossed up along
with the levy and the liability of the levy will have to be discharged by the
service recipient.
Compliance,
interest and penal provisions
Payment: The equalisation levy collected is required
to be paid by 7th day of the month following the month in which the
equalisation levy has been collected.
Furnishing of
statement: WHAPL shall
furnish a statement electronically in Form No. 1 in respect of all specified
service entered into during the financial year on or before June 30 immediately
following the respective financial year.
Interest: Failure to make the payment would lead to
interest payment at simple interest method of 1 percent for every month (or
part of the month) upto the month of payment.
Penalty: where there has been a failure to deduct
equalisation levy (wholly or partly), penalty equal to equalisation levy is
required to be paid. Further, failure to furnish the statement in Form No. 1 as
specified above would make WHAPL liable for INR 100 per day of default.
Disallowance
of expense u/s 40(a)(ib)
Any
consideration paid or payable to a non-resident for a specified service
(mentioned above) on which equalisation levy is deductible under the provisions
of Chapter VIII of the Finance Act, 2016 and such levy has not been deducted or
after deduction has not been paid on or before the due date of filing the
return of income is disallowable u/s 40(a)(ib) of the Income-tax Act, 1961.
Further, if such equalisation levy has been deducted in any subsequent year or
has been deducted during the previous year but paid after the due date of
filing return of income (u/s 139(1) of the Income-tax Act, 1961), then such
expense shall be allowed as deduction in computing the income of the previous
year in which such levy has actually been paid.
Income tax
benefits
The Income-tax law has been amended to provide for exemption arising
from any income arising from any e-commerce supply or services made or provided
or facilitated, and chargeable to equalization levy as explained above.
Goods & Service tax
GST on RCM basis on import of service
As per Section 2(11) of IGST Act, import of
service means supply of service, where:
Supplier of service is located outside India
Recipient of Service is located in India
The place of supply of service is in India.
Applicability of GST on Import of Service
on Reverse Charge Mechanism (RCM) basis:
In terms of Notification no.10/2017-IT(R) dtd 28.06.2017, one of the notified category on which GST is applicable
under RCM is “any service supplied by any person who is located in a
non-taxable territory to any person other than non-taxable online recipient”.
IGST liability under RCM in case of Import of service has
to be paid in cash/bank. GST ITC to the extent of IGST paid can be availed
and utilized in the same month subject to ITC eligibility.
Therefore,
considering the above, the import of services from in the form of online advertisements
on digital platforms (like Google/ Facebook (Foreign entities)) would be liable
to GST on RCM basis at 18 percent.
E-commerce
Income-tax
Equalisation levy on E-commerce operators
The concept of equalisation levy was
introduced by Finance Act 2016 to tax certain services and recently through its
amendment in the Finance Act 2020, its scope has been enhanced to cover further
transactions. This levy is not through the Income-tax Act, 1961, but through
the Finance Act 2016. Through the amendment made through Finance Act, 2020,
equalisation levy of 2 percent has been imposed on the e-commerce
operators on the amount of consideration received or receivable for e-commerce
supply or services made or providedor facilitated by it
on or after 1st day of April 2020.
Having
understood the above, it becomes very important to understand the scope of
e-commerce supply or service and the scope of e-commerce operators, which is
covered by this amendment and therefore it is important to understand how the
Finance Act 2020 defines these terms, which has been stated as under:
“e-commerce supply or services” means—
(i)
online sale of goods owned by the e-commerce operator; or
(ii)
online provision of services provided by the e-commerce operator; or
(iii)
online sale of goods or provision of services or both, facilitated by
the e-commerce operator; or
(iv)
any combination of activities listed in clause (i), (ii) or clause (iii);]
Therefore, the scope above is
wide to cover the goods owned or facilitated by the
e-commerce operator. Therefore, if an e-commerce operator sells its owned goods
on the e-comm platform, still the same will fall within the purview of the
equalisation levy provisions introduced. However,
it is imperative to understand whether who all would be covered within the
ambit of e-commerce operator as per the amendments made by Finance Act,
2020.
“e-commerce operator” means a non-resident
who owns, operates or manages digital or electronic facility or platform for
online sale of goods or online provision of services or both
From the above, it is
clear that the Finance Act, 2020 intends to cover only
non-residents who own, operates or manages digital or electronic
facility/ platform.
Example: E-commerce
giants who are operating from their home countries or countries outside India,
like certain hotel accommodation reservation platforms, etc. will have to pay
this levy for the bookings made through their portal online.
The difference
between the provisions of equalisation levy in case of online digital
advertisement services and in case of levy on such e-commerce operators is that
in case of former, the deduction has to be done by the service recipient
whereas in case of later, the levy has to be charged by the e-comm operator and
recover from the customer and pay to the Government Treasury.
Exclusions
where the
e-commerce operator has a permanent establishment in India and such e-commerce
supply or services is effectively connected with such permanent establishment
where the
equalisation levy is leviable on online advertisement and related activities
sales, turnover
or gross receipts, of the e-commerce operator from the e-commerce supply or
services made or provided or facilitated is less than INR 20 million during the
financial year.
Compliances, interest & penalty
The equalization levy is to be paid by the non-resident e-commerce
operator quarterly within the following due dates:
Date of ending of the quarter
Due date
30 June
7 July
30
September
7
October
31
December
7
January
31 March
31 March
Interest:
Delayed
payment carries simple interest at the rate of 1 percent for every month
or part of a month
Penalty: Failure to pay equalisation
levy attracts penalty equal to the amount of equalisation levy
Income-tax benefits
The Income-tax
law has been amended to provide for exemption arising from any income arising
from any e-commerce supply or services made or provided or facilitated, and
chargeable to equalization levy as explained above.
Impact analysis
Previously,
the government had introduced the concept of “Significant Economic Benefits” in
the definition of “Business Connection” which specifically aimed towards
getting the non-resident entities operating in India through digital means
under the tax regime. However, the treaties benefitted the respective
non-residents as there was no such provision under the PE articles of the
treaties. Having said that, the Government of India has now introduced this
concept of taxing such e-commerce companies under equalization levy which will
have a significant impact on the non-resident supplying goods and services
digitally. This is so because the definition of ‘e-commerce operators’ and
‘e-commerce supply or services’ are very wide in scope. Therefore, taxpayers
may now need to evaluate various scenarios to understand the implication under
this. For instance, even where the parent company provides any IT services to its
subsidiary company, such provisions will have to be looked into from
applicability perspective.
More
importantly, it is also pertinent to note that supply of goods or service from
one non-resident to other also may attract these provisions (where the is some
nexus with India). It is important to note that the provisions of equalization
levy are not part of Income-tax and therefore benefit of treaty may not be
available in relation to such levy. Additional guidance on this subject is
awaited from the Government on these provisions.
TDS u/s 194-O for E-commerce operators
The Finance Act 2020 has inserted a new section 194-O in the Income-tax Act, 1961 where an e-commerce operator facilitating the sale of goods or provision of service of an e-commerce participant through a digital or electronic facility or platform of such e-commerce operator, then such e-commerce operator shall at the time of payment or credit of amount of sale or service or both to the e-commerce participant, whichever is earlier, deduct tax at 1 percent of the gross amount of such sales or service or both.
Therefore, in
order to understand the applicability of the provisions of this section, it is
ideal to first understand as to who would be considered as an e-commerce
operator and who would be considered as an e-commerce participant:
“e-commerce operator” means a
person who owns, operates or manages digital or electronic facility or platform
for electronic commerce;
“e-commerce participant” means a person
resident in India selling goods or providing services or both, including
digital products, through digital or electronic facility or platform for electronic
commerce;
“electronic commerce” means the
supply of goods or services or both, including digital products, over digital
or electronic network;
Therefore, any person resident in
India sells goods or providing services or both (including digital products)
through digital or electronic facility or platform, then such person would be
eligible to receive such receipts from sales occurred through such platform or
electronic facility after deduction of 1 percent as TDS by such operator who
owns, operates or manages such digital or electronic facility. This amount so
deducted will have to be deposited by such e-comm operator with the Credit of
Central Government and the e-comm participant will claim credit of the same in
its ITR.
Tax not deductible
Tax is not deductible under the
said section if the e-comm participant is an Individual or HUF and the gross
amount of such sale of goods/ services through the said e-comm operator during
the previous year does not exceed Rs. 5 Lac and such e-comm participant has
furnished his PAN or Aadhar to the e-comm operator.
Therefore, it is important to
note that:
An e-comm operator u/s 194-O can be a resident or a
non-resident
An e-comm participant u/s 194-O has to be a resident person
There can be a situation where e-comm operator will have to
comply with both Equalization Levy as well as provisions of deductions u/s
194-O
The provisions of this section are so vide that it may also
include operators selling financial products on the digital platform for eg.
Mutual fund distributors, insurance policy aggregators, etc.
Board may have to come out with a clarification where it lays
down the inclusions and exclusions of this provision to remove difficulties
Goods & Service tax
TCS for E-commerce operators
Electronic Commerce has
been defined in Sec. 2(44) of the CGST Act, 2017 to mean the supply of goods or
services or both, including digital products over digital or electronic
network.
Electronic Commerce Operator
has been defined in Sec. 2(45) of the CGST Act, 2017 to mean any person who
owns, operates or manages digital or electronic facility or platform for
electronic commerce.
As per Section 24(x) of the CGST
Act, 2017 the benefit of threshold exemption is not available to e-commerce
operators and they are liable to be registered irrespective of the value of
supply made by them.
Tax collections
The e-commerce operator is required
to collect an amount at the rate of one percent (0.5% CGST + 0.5% SGST) of the
net value of taxable supplies made through it, where the consideration with
respect to such supplies is to be collected by such operator. The amount so
collected is called as Tax Collection at Source (TCS). An e-commerce company is
required to collect tax only on the net value of taxable supplies. In other
words, the value of supplies which are returned are adjusted in the aggregate
value of taxable supplies.
Credit of TCS
The amount of TCS paid by the
operator to the government will be reflected in the GST returns of the actual
registered supplier (on whose account such collection has been made) on the
basis of the statement filed by the e-comm operator. The same can be used at
the time of discharge of tax liability in respect of the supplies made by the
actual supplier.
Disclaimer: The views expressed in this note are the personal
view of the writer and should not be considered as an opinion by any manner.
For deciding any implication, it is always advised that you approach a
consultant and obtain a professional advice.
