Management control, internal control, accounting control, Risk Based Internal Audits


In implementing its goals and objectives, Organisations shall face risks that are potentially increasing and complex due to the dynamics of the development and demand, both internally and externally. Therefore, it requires a comprehensive and integrated risk management with the strengthening in the aspect of internal control.
The implementation of risk management shall be conducted by referring to the best international best practices divided in three (3) categories. First, risk management of first line of defense conducted by the working unit implementing business process. Second, risk management of second line of defense conducted by the working unit which has the risk management function and independent from the work unit conducting business process. Third, risk management of third line of defense conducted by the working unit implementing the function of internal audit to ensure the activities of risk management are performed effectively.

With the availability of this risk management in three phases, it is expected that the process of duty implementation of Organisations, in particular in decision making can be conducted by observing the aspects of prudentiality, good governance principle, and obtaining optimum result toward the performance, finance and credibility of policy.
Based on the above framework, the internal audit has the important role in the quality assurance to the overall work process in Organisations. The scope of internal audit function includes the implementation of internal audit and consultation through the provision of opinion and recommendation toward the process of governance, risk management, and Controlling.

The implementation of internal audit function of Organisations shall use the methodology of Risk Based Internal Audit. The high the audit target risk, the higher the frequency of internal audit implementation. The work process with high risk shall be audited every year, whereas the work process with medium risk and low risk shall be audited in a longer time span, namely once in 2 or 3 years.

Internal Controls – Thinking Inside the Box (COSO Cube)
As the financial year 2015-16 crosses the midway, many companies would still be in the process of coming to terms with the new ICFR (Internal Controls over Financial Reporting) in the Indian scenario.
Any new thing that comes up for implementation generally has some teething issues, simply because change management as a process is frictional and for any successful implementation; a well-defined and well managed project plan is a must.
Business as we see through the lens of Internal Audit, starts off with a vision (mostly emanating from ideas) translates into a mission with a strategy defined to achieve that mission, and strategy further rolls down to objectives (Strategic, Operational, Financial, Compliance) for each of the business processes, which are managed by people; duly supported with technology & resources to ensure that they are in compliance to the policies, laws & regulations while achieving their strategy and mission.
Simply put: Vision & Mission --> Strategy --> Goals & Objectives --> Mapped to business processes --> which are managed by people --> For ensuring achievement of Goals & Objectives --> resulting into Implementation of strategy --> resulting into achieving the mission.
The COSO framework has been used globally and is time tested and has a very rational approach for implementation. Where most companies struggle to achieve a proper implementation of internal controls is they think of Internal Audit as a value adding function / activity and are almost asking for an “Out of the box approach / thinking” and that is where some of those organizations completely miss the point. Internal Audit is not only about value creation but equally about Value Protection, and in today’s scenario, more about risk management, that is where Risk Based Internal Audits have become the fad.
The need today is not to have number of controls but to have right quality of controls, simply because there is a cost to every control you implement in the organization (in terms of time and resources involved).
Where most organizations would do well is, while doing their Enterprise Risk Management exercise, they should define their goals and objectives (which should be enablers for implementation of the strategy and for achievement of objectives) and further map each of those goals & objectives to the business processes and identify risk champions to ensure that those goals and objectives are met within the timelines, keeping in view the overall timeline for fully implementing the strategy.
Once this is done, the role of internal audit function would be enhanced qualitatively and that is where the internal auditor will have to think constructively inside the box (COSO cube), because all 5 parameters of the cube will be inextricably linked to strategic, operational, financial and compliance objectives and that is where the organizations would begin to appreciate the right set of controls being implemented for their business.
Disclaimer: The views expressed in this post are personal views

Statutory Requirement of Internal  audit u/s 138


Inbound Investment into India - FDI - Foreign Direct Investment , FPI- Foreign Portfolio Investment

Inbound Investment - Foreign Direct Investment in India

Automatic Route 
FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which require prior approval of the Government:

 i) where provisions of Press Note 1 (2005 Series) issued by the Government of India are attracted.

 ii) where more than 24% foreign equity is proposed to be inducted for manufacture of items reserved for the Small Scale sector.

 iii) FDI in sectors/activities to the extent permitted under Automatic Route   does not require any prior approval either by the Government or the Reserve Bank of India. 

The investors are only required to notify the Regional Office concerned of  the Reserve Bank of India within 30 days of receipt of inward remittances and file the required documents along with form FC-GPR with that Office within 30 days of issue of shares to the non-resident investors. 

Government Route 
 FDI in activities not covered under the automatic route requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB), Ministry of Finance. Application can be made in Form FC-IL; Plain paper applications carrying all relevant details are also accepted. Decision of the FIPB usually conveyed in 4-6 weeks. Thereafter, filings have to be made by the Indian company with the RBI 

Indian companies having foreign investment approval through FIPB route do not require any further clearance from the Reserve Bank of India for receiving inward remittance and issue of shares to the non-resident investors. The companies are required to notify the concerned Regional Office of the Reserve Bank of India of receipt of inward remittances within 30 days of such receipt and submit form FC-GPR within 30 days of issue of shares to the non-resident investors. 

Update on Forms to be filed on receipt of FDI

RBI vide circular No. 40 dated 1st February 2016, has enabled filing online returns with Reserve Bank of India with a view to promoting the ease of reporting of transactions related to Foreign Direct Investment (FDI).

The Reserve Bank of India, under the aegis of the e-Biz project of the Government of India has enabled online filing of the following returns with the Reserve Bank of India viz.
·   Advance Remittance Form (ARF) which is used by the companies to report the FDI inflows to RBI;
·   FCGPR Form which a company submits to RBI for reporting the issue of eligible instruments to the overseas investor against the above mentioned FDI inflow; and
·   FCTRS Form which is submitted to RBI for transfer of securities between resident and person outside India.

At present both the options, i.e. online filing and physical filing of above mentioned forms, are available to the users. Based on the experience it has been decided that beginning February 8, 2016 the physical filing of forms ARF, FCGPR and FC-TRS will be discontinued and forms submitted in online mode only through e-Biz portal will be accepted.

To read the full circular please click here

What is considered as FDI - Foreign Direct Investment

Foreign investment is reckoned as FDI only if the investment is made in equity shares of an Indian company or fully and mandatorily convertible preference shares or  fully and mandatorily convertible debentures “with the pricing being decided upfront as a figure or based on the formula that is decided upfront”**.

Routes for FDI flow in to Indian companies:
 An Indian company may receive Foreign Direct Investment under the two routes as given under:
i. Automatic Route
FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.
ii. Government Route
FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.

Modes of payment allowed for receiving Foreign Direct Investment in an Indian company:
An Indian company issuing shares /convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures by:
(i) inward remittance through normal banking channels.
(ii) debit to NRE / FCNR account of a person concerned maintained with an AD category I bank.
(iii) conversion of royalty / lump sum / technical know how fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares.
(iv) conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.
(v) debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.

Procedure to be followed after investment is made under the Automatic Route or with Government approval
A two-stage reporting procedure has to be followed
Stage – 1: Reporting about inward remittance received :
Within 30 days of receipt of share application money/amount of consideration from the non-resident investor, the Indian company is required to report to the Foreign Exchange Department, jurisdiction Regional Office of the Reserve Bank of India.
Documents to be submitted at RBI  regional offices:
1.      Advance Reporting Form (Annexure II) duly filled & signed by the client
2.      Name and address of the foreign investor/s
3.      Date of receipt of funds and the Rupee equivalent;
4.      Name and address of the authorised dealer through whom the funds have been received;
5.      Details of the Government approval, if any; and
6.      KYC report on the non-resident investor from the overseas bank remitting the amount of consideration.
Time limit for issue of shares/Debentures:
The Indian company has to ensure that the shares/Debentures shall be  issued within 180 days from the date of inward remittance or date of debit to NRE / FCNR (B) / Escrow account.
Violation:If the shares or convertible debentures are not issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE / FCNR (B) / Escrow account, the amount shall be refunded.
Relaxation: Reserve Bank may on an application made to it and for sufficient reasons permit an Indian Company to refund / allot shares for the amount of consideration received towards issue of security if such amount is outstanding beyond the period of 180 days from the date of receipt.

Stage – 2 : Reporting about issue of FDI Instruments i.e shares/FCPS/FCD:
The company shall report Within 30 days from the date of issue to the jurisdictional regional office of the Reserve bank of India with following documents
1.Form FC-GPR (Annexure I) duly filled & signed By Managing Director/Directors/secretary
2. Certificate from Statutory Auditors/ SEBI registered Merchant Banker / Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.
3.Certified copies of Foreign Inward Remittance certificate (FIRC’s)

Are the investments and profits earned in India repatriable:
All foreign investments are freely repatriable (net of applicable taxes) except in cases where:
Ø  The foreign investment is in a sector like Construction and Development Projects and Defence wherein the foreign investment is subject to a lock-in-period

Ø  NRIs choose to invest specifically under non-repatriable schemes.
Further, dividends (net of applicable taxes) declared on  foreign investments can be remitted freely through an Authorised Dealer bank.

**No upfront pricing – consequences: Any foreign investment into an instrument issued by an Indian company which does not involve upfront pricing of the instrument should be reckoned as Eternal Commercial Borrowing and have to comply with the ECB guidelines.( and not FDI guidelines)

Options for Foreign Company to set up operations in India
As a Foreign Company
·         Liaison/Representation Office
·         Project office
·         Branch office
As an Indian Company
·         Joint Venture
·         Subsidiary Company (Wholly owned)
Procedureal brief for a Foreign Company
Option 1: Setting up of Liaison / Representation Office in India or Project office or Branch office
Step 1: Requires permission of RBI (Form FNC 1)
Step 2: Set up office/ branch in India
Step 3: Intimate concerned Registrar of Companies (ROC) within 30 days from the date of setting up office, along with prescribed information & documents
-       This liaison / representation office can act only as a channel of communication for foreign company, and its role can be to collect information about potential Indian consumers and serve them information related to foreign company products or services. However,  It can though promote export/import from/to India and also facilitate technical/financial collaboration.
-       Project office is suitable for a foreign company looking to undertake a temporary project/site office in India
-      Low compliance costs and direct legal control / arm of foreign company
-      Repatriation of surplus is permitted
-       No commercial activity (directly or indirectly) is permitted to undertake in India for a liaison office
-       No other activities other than related to project are permitted
-       It can’t earn any income in India
-       Such offices may be considered as foreign company for Income tax and therefore branch income earned in India attracts tax @ 40% + applicable cess (where branch income = profit attributable to branch operations compared to overall / global operations
As an Indian Company
Option 2: Setting up another company in India as an Indian company
Under this option, foreign company and/ or directors of the foreign company can become promoter and float the company (Wholly owned Subsidiary) Or
Relatives of foreign directors, who are resident of India, can be made promoter of the Indian company (Joint Venture)
1.     No permission required from RBI unless foreign funds are used by that new company
2.     Compliance cost is relatively low compared to foreign branch
3.     Income of the Indian company will be taxed @ 30% + applicable Cess
4.     As the Indian company will issue invoices to foreign company for the work undertaken by it, so that transfer prices between them can be planned to ensure optimization of taxes.
1.     Repatriation of profit is restricted
2.     Foreign direct investment (FDI) is permitted only to the extent sectoral equity caps allowed by FDI policy
3.     Procedural aspects to be followed as per Department of Industrial Policy & Promotion, Government of India (
Note: If the turnover of the new entity (under both the options) exceeds Rs. 15 Cr per annuam, transfer pricing between them may be examined under Indian Income Tax, in addition to an independent transfer pricing report by a qualified CA along with tax return of the new entity

Foreign Portfolio Investment vs Foreign Direct Investment

DEFINITION of 'Foreign Portfolio Investment - FPI'

Securities and other financial assets passively held by foreign investors. Foreign portfolio investment (FPI) does not provide the investor with direct ownership of financial assets, and thus no direct management of a company. This type of investment is relatively liquid, depending on the volatility of the market invested in. It is most commonly used by investors who do not want to manage a firm abroad.

'Foreign Portfolio Investment - FPI'

Foreign portfolio investment typically involves short-term positions in financial assets of international markets, and is similar to investing in domestic securities. FPI allows investors to take part in the profitability of firms operating abroad without having to directly manage their operations. This is a similar concept to trading domestically: most investors do not have the capital or expertise required to personally run the firms that they invest in.

Foreign portfolio investment differs from foreign direct investment (FDI), in which a domestic company runs a foreign firm. While FDI allows a company to maintain better control over the firm held abroad, it might make it more difficult to later sell the firm at a premium price. This is due to information asymmetry: the company that owns the firm has intimate knowledge of what might be wrong with the firm, while potential investors (especially foreign investors) do not.
The share of FDI in foreign equity flows is greater than FPI in developing countries compared to developed countries, but net FDI inflows tend to be more volatile in developing countries because it is more difficult to sell a directly-owned firm than a passively owned security.

Govt Liberalises FDI policy to boost Inflows

The new circular issued by the Department of Industrial Policy and Promotion (DIPP) recently, states that under the new norms, Indian companies have been allowed to issue equity against import of capital goods and liberalise conditions for seeking foreign investment for production and development of agriculture seeds.

The facility of conversion of capital goods import into equity was earlier available for companies raising external commercial borrowings (ECBs).

Union Commerce and Industry Minister Anand Sharma said the Circular 1 of 2011 third edition of the Consolidated FDI Policy was part of ongoing efforts of procedure simplification and FDI rationalisation which will go a long way in inspiring investor confidence.

The government also removed the restrictive condition of obtaining prior approval of Indian companies for making investments in the same field. The circular said, “It is expected that this measure will promote the competitiveness of India as an investment destination and be instrumental in attracting higher levels of FDI and technology inflows into the country.”

How to become eligible for lower deduction of TDS

15G/H for lower deduction of TDS on Interest Income

When can the bank deduct tax at source? 

Before I explain as to who can submit form no. 15 G and who can submit 15 H, let us first understand when bank deducts tax on the interest payable. The bank will deduct tax at source once the amount of interest to be credited in respect of all the fixed deposits taken together exceeds Rs. 10,000 in a financial year. This limit of Rs. 10,000 is applicable for each branch of a bank and not for all the branches of a bank taken together. So each branch of the bank will see whether the interest for the whole year on all the FDs exceed the threshold of Rs. 10,000. One interesting point to be noted here, which many people are not aware, is that banks are not required to deduct any TDS on interest credited on your savings bank account even the amount of interest may be very substantial. Please note that in case of fixed deposits made for longer duration where the interest will be paid to you only on maturity, the bank will deduct tax at source on the interest accrued for the year even though no interest in fact has been paid to you. 

Who can submit form No. 15G? 

First and foremost only a person who is resident in India can submit form No. 15G. So an NRI cannot submit this form.  Any person other than a Company can submit form No. 15 G. So any Individual and HUF can submit form No. 15G. However it is not that every Individual or HUF can submit form No. 15G. Only the individual or HUF, whose tax on the estimated income for the year is nil and the amount of interest income from all the sources does not exceed the minimum exemption limit, can submit this form. So for being eligible for you to submit this form, you need to satisfy both the above conditions. In a situation where due to various deductions the tax payable on total income may be nil but if the total amount of interest income is expected to exceed Rs. 2 lacs you cannot submit this form. 

Who can submit form No. 15H?

 Any resident Individual who is above sixty years of age or completes sixty years during the financial year can submit form No. 15H provided his tax liability on the basis of his estimated income is nil for the financial year though the total amount of interest from all sources may exceed Rs. 2.50 lacs, the minimum amount liable for tax. So only senior citizens can submit this form.

 What precautions to be taken while submitting form no. 15G and 15H?

 Please ensure to submit your PAN details to the bank while submitting the form No. 15G or 15 H. In case you fail to provide your PAN number to the bank, the bank will deduct TDS @ 20 percent against the applicable rate of 10 percent even if you have submitted form no. 15G and 15H. I would advise you to submit a copy of your PAN card by way of separate letter and obtain written acknowledgement for the same. Please obtain acknowledgement for form no. 15 G or 15H while submitting it. So it is advisable to get the form submitted personally rather than sending it through post so as to ensure proper acknowledgement.

 What if the bank has already deducted tax before submission of the form? 

The form no. 15G or 15H as the case may be, should be submitted at the beginning of the year so as to avoid a situation where bank has already deducted the tax before you submit the form. However in case the bank deducts the tax in spite of you having submitted the form or before you actually submit the same, the bank will not refund the tax already deducted, as the bank would have already deposited the tax with the government. In such a situation the only option available with you is to file your income tax return and claim the amount of TDS a refund.

New Process of form 15G/H notified

We are pleased to release a Tax Alert which summarizes Notification No. 76/2015/F. No.133/ 50/ 2015 -TPL dated 29 September 2015 issued by the Central Board of Direct Taxes (CBDT) for change in procedure for furnishing Nil withholding declarations (declarations) by payees in Form 15G/H.

Under the existing procedure, payees need to furnish such declarations to payers in paper format, in duplicate, and the payers are required to furnish one copy thereof (also in paper format) to the Tax Authority  within seven days from end of the month in which such declarations are received.

Under the new procedure effective from 1 October 2015, payees have the option to furnish such declarations in paper format or electronic format. The payer needs to assign a Unique Identification Number (UIN) to each declaration and include the information of UIN in quarterly withholding statements which are usually furnished in electronic form. The new procedure dispenses physical furnishing of copies of declarations to the Tax Authority on a monthly basis which will now form part of reporting in the quarterly withholding statements. However, the new procedure obliges the payers   to preserve the declarations for a period of seven years from the end of the financial year in which declarations are received and make them available to the Tax Authority on requisition.

The new procedure considerably simplifies the procedure of receipt of declarations and furnishing of information thereof to the Tax Authority.

The new procedure is a further step by the Government in improving “ease of doing business” and harnessing technology to reduce cost of compliance and ease compliance burden for all stakeholders.

The payers will need to modify their systems for acceptance of declarations in electronic form, allotment of UIN and furnishing of information to the Tax Authority as per procedure, format and standards to be prescribed by the Tax Authority in due course.

Procedure for certificate of lower TDS under section 197 in form 13
For applying lower TDS certificate to the TD department, following documents are required to be submitted:

1.   Covering letter disclosing nature of business of the company, reason for company should get lower TDS certificate and also details of the party with their correct address & TAN.

2.   New Form 13

3.   Estimated financials & computation of Total Income

4.   Audited financials for the last 3 Years

5.   Tax Audit Report of the Last 3 Years

6.   Income tax return acknowledgment of last 3 Years

7.   E TDS return acknowledgment for last 2 years of all the 4 quarters.

8.   In case of any short payment of TDS in last 3 years, proof of the payment of TDS.

9.   Copy of application & certificate obtained for earlier years.

  • After submitting the aforesaid application to the TDS department, the AO will review your documents and they may ask further queries & documents to satisfy that your company is eligible for getting the lower TDS certificate.

  • It must be noted that AO is not bound to issue TDS certificate, once the application had been filed. The AO issue the certificate based on the merit on case to case basis.

  • You must provide the correct TAN of all the parties for whom you want the TDS certificate as now a days, department are issuing only system generated certificate based on the TAN.

  • Further, from April 1, 2011 department are not issuing nil TDS certificate to anyone. Hence, you must apply only for lower TDS certificate only and must mention the lower rate as required.