What is VAT?

 The Value Added Tax (VAT) in India is a state level multi-point tax on value addition which is collected at different stages of the sale. It is a compulsory payment to the government under any law. It can be charged by governments on goods, income or any activity. VAT is an indirect tax, i.e., the person paying the tax passes on the burden to another person. As Income tax is a tax on income and Service tax is levied on services, while Value Added tax is levied on sales.

Input Tax Credit (ITC)

 VAT is imposed at each stage of sales on the entire sales value and the tax paid at the earlier stage is allowed as set off. This credit availability is called as input tax credit.

VAT = Tax collected on sales – Tax paid on purchases

OR

Output tax – Input tax

VAT Registration

Registration is the process of obtaining a unique number for a dealer from authorities under VAT Act.

Eligibility: Any dealer whether a trading or manufacturing business, a sole proprietorship or a partnership firm or a private limited company whose annual turnover is above Rs. 10 lakhs (Rs.20 lakhs in case of Delhi)  is under compulsion to get registered with the VAT department. This limit can be reduced or increased by the State law.

VOLUNTARY REGISTRATION: A dealer not under compulsion may also obtain registration. The dealer will avail the benefit of issuing tax invoice and passing on the credit of taxes paid by on purchase of goods.

Procedure of VAT Registration

 The following procedure is required to be followed for registering under VAT Act –

• Submit an application for VAT in Form 1 with the following documents – 
  • CST registration certificate
  • Professional tax registration certificate
  • Address proof and ID proof and four photographs of the Partner/Proprietor/Director
  • PAN No. and Bank No. of the Partner/Proprietor/Director
  • Copy of the rental agreement of the place of work
  • Details of business activities
  • Partnership Deed in the case of a partnership firm and MOA and AOA in the case of a private limited company.

• The concerned authority will then inspect the place of business within a specified time.
• After the inspection and on the payment of a prescribed fee to the local office, a TIN number and a VAT Registration Certificate will be allotted.
• The Act may contain provisions relating to suo moto Registration of a dealer. If the competent authority gets to know after the conduction of inspection or inquiry that the dealer who is liable to register for VAT has failed to inform the competent authority of his liability to be registered, then it may proceed to register such person under the VAT Act.
• TIN Number is different for different dealers, and it facilitates cross-checking of information. It ensures that there is no bogus or fraud invoices and other tax compliances.

Remember registration enables the entity to avail the benefit of Input Tax Credit. This is however not true in the case of certain purchases.

Exceptions to Input Tax Credit

Input tax credit shall not be allowed on the purchases of goods which are –

• Utilized in the manufacture of Exempted goods (exempted goods are those goods on which VAT is not charged, for example, Fundraising event, education, and training, etc.)
• From a registered dealer opting for the Composition Scheme*.
• Imported from Outside India.
• Where the purchase Invoice is not available.
• Included in the Negative List.
• For Personal Use.
• From Unregistered dealers as they are not empowered to issue VAT invoice.
• Where the amount of Tax is not shown separately on the invoice*.
• From other States.

Tax Invoice

For effective implementation of VAT, the invoice is mandatory. The whole structure of input tax credit is based on tax invoice, without which credit cannot be claimed. 

• Contents of tax invoice should include –
  • Seller’s Name, Address, Phone number.
  • TIN
  • Tax Invoice Number
  • Date of issue of invoice
  • Buyer’s Name and Address
  • Buyer’s VAT Registration No. if any
  • Quantity, Description of goods, Price Per Unit, Value, VAT Rate
  • Amount of tax
  • Total amount payable and Signature of the selling dealer or his authorized employee.

Exempt Business

If the company is engaged in the selling of exempted goods only, then it would be an exempted business and it would not be registered under VAT and also it cannot avail any input tax credit on its purchases.

However, if the company sells, leases or lets any commercial land or property, then it has an option to waive the exemption and charge VAT at the standard rate. This is called ‘opting to tax land and buildings.’

Partly Exempt Business

An entity is partly exempt when it is registered under the VAT Act and incurs VAT on any item that is used to make exempted goods.

Special Economic Zones (SEZ)

Special Economic Zones have been established by the Government to grant incentives to exports of services and goods. These areas are specifically defined as duty-free areas. These zones are to be treated just like a foreign territory and therefore, services and goods going to any specified areas located in these Zones are treated as exports. The government has exempted all taxable goods provided to a developer of the special economic zone or units located in the Special Economic Zone. Hence, units situated in these zones are exempt from the ambit of VAT.

SEZ, STP, EHTP, and EOU are being set up to promote industry and create an industrial base. Sales to these units are treated at par with exports and therefore goods sold to them are zero rated to promote exports.

Who will not be covered by VAT? 

Small Dealers: Value Added Tax will not cover businesses whose turnover is less than a certain limit. As per White Paper, VAT Act should be so designed that high taxpayers should not be spared from paying more tax, and the small dealers should be free from hassles of compliance procedures.

Dealers with limited turnover would have the option to pay a lump sum amount based on its total turnover at the specified rate as low as 0.25%. For example, in Odisha, a trader having an annual turnover of less than Rs. 2,00,000/-  will not be covered under VAT, and the general tax rates will not be applied.

Composition Scheme

The conditions for a composition scheme include:

• Turnover of dealer should be within Rs. Ten lakhs to Rs. 50 lakhs.
• Such a dealer would have the option to pay a fixed amount of tax based on its gross annual turnover at the fixed rates (0.25%).
• However, following sales are not eligible for the composition scheme of VAT Act, because other Acts apply to them.
• A manufacturer or a dealer who sells goods in the course of inter-state trade. This is because the provisions of Central Sales Tax (CST) will apply to it. 
• A dealer who sells goods in the course of import or export out of India, i.e., whose goods cross the boundaries of India. This is so because Custom Duty is payable on it.
• A dealer is transferring goods to the branch. Since it is not Sales and therefore no VAT shall be applicable or payable on it.
• Any other activity on which VAT Act is not applicable.

Advantages: 

• It simplifies the calculation.
• A small tax would be payable.
• Return is filed less number of times.
• Simple records are required to be maintained.

Disadvantages: 

• No input tax credit can be availed.
• Dealers choosing Composition Scheme cannot issue tax invoices.

For example, B follows a composition scheme, and his total turnover is Rs. 20,00,000/-. General tax rates would not be applicable to him, and he is required to pay Rs. 5,000/- (VAT @ 0.25%).

VAT and its Types

The Value Added Tax (VAT) is an indirect multistage tax that is charged as a proportion to the value-added on each stage commencing from the production of the good to its purchase by a consumer.

The following are the steps involved in the taxation of goods under the VAT system:

1. The raw materials, in general, pass through various stages and processes of the production and distribution, and its entire burden lies upon the final purchaser.
2. The first manufacturer’s output becomes the second manufacturer’s input who then further processes it prior to supplying it to the third manufacturer. This process continues until the emergence of the ultimate product.
3. The final good so produced goes to the distributor or wholesaler, who then sells it to the retailer.
4. The retailer then sells the product to the final buyer/consumer.

Usually, the manufacturer or retailer is capable of claiming tax credit but that is not the case for the final purchaser.

VAT is usually imposed by application of 3 methods

• Addition method

In this method, the VAT is levied on the value of addition made by a manufacturer/dealer, including the profits charged by him. Value of addition includes: 

• Wages;
• Salary;
• Power;
• Electricity;
• Rents;
• Depreciation in the value of capital goods,
• Manufacturing;
• Trading;
• Marketing expenses;
• Capital interests and so on.

• Credit invoice/invoice based method

This method is a widely used method in almost all nations excluding Japan. Here the sales transactions are taxed with the customer being informed of the VAT on the final transaction. The businesses may obtain a credit for the VAT paid on input materials and services.

• Subtraction/account-based method

In this method at the end of the reporting period, a business calculates the value of all taxable sales and deducts the sum of all taxable purchases and the VAT rate is applied to the difference. This method is presently used solely by Japan.

Features of the VAT system

1. VAT is an indirect multistage tax or multipoint tax.
2. VAT is levied upon value addition to the goods, i.e. (wages+interest+costs+profits).

The additional value is measurable by deducting the purchase price of inputs from the selling value of the goods.

• It is immaterial for the application of VAT whether the buyer is a dealer of goods or a consumer.
• VAT makes the promotion of neutrality, such as-

1. making a decision for the purchase of goods,
2. deciding the production techniques of goods,
3. deciding the nature of the organization.

• VAT is a single tax and there is an absence of any education cess or surcharge.
• VAT rates are mostly uniform throughout the nation.
• The invoice has an imperative document for VAT.
• VAT is inapplicable on a seller with less than 5 lacs of annual sales turnover.
• Under the VAT system, credit of input taxes is only permitted if proper records are kept and maintained with respect to various capital goods input.
• VAT has ensured transparency because it shows the amount of VAT paid to the buyer on sales.
• VAT helps in deciding its rates of fixation. It also shows the Government the amount of tax collected at each and every stage, initiating from the production to sales.
• VAT is inapplicable on exportation, but the exporter can obtain refundment of input tax credit.
• In VAT there is no scope of tax evasion and therefore it generates a higher amount of revenue, in comparison to other forms of taxation.

VAT Calculation

VAT = Output Tax – Input Tax.

Output tax is the percentage of the selling price accrued by the seller from the selling of the final good.

Input tax is the percentage of cost price paid by a buyer for acquiring essential raw materials for producing the final goods.

For example – John is a carpenter who purchased wood Rs 2000 and paid an input tax of 10% = Rs 200.

He made a wooden table out of the purchased wood and sold it for Rs 3000. On this, he collected an output tax of 10% on the selling price, i.e. Rs 300.

Therefore, the final VAT payable: Rs 300 – Rs 200 = Rs 100.

Advantages and Disadvantages of the VAT system

Advantages

1. Reduced tax evasion and increased tax compliance.
2. VAT is simple and thus brings certainty.
3. VAT is transparent as the amount of VAT levied is clearly displayed on the bill or invoice.
4. Cheaper exports in case of exportation.
5. VAT is refundable.
6. VAT has a better accounting system as the record of tax paid on purchases are required maintenance.
7. VAT is tax neutral as there is no distinction between labour-intensive industries and capital-intensive industries since the input of both capital products and purchases is available.

Disadvantages

1. Although mentioning in the invoices reduces tax evasion, yet it is still possible through the generation of fake invoices.
2. Increased compliance cost, because of the maintenance of purchase and sell records.
3. This system has distortion as it is improperly due to several exemptions/concessions.
4. VAT being a consumption-based taxation system leads to higher tax collection by the State consuming more rather than the State making higher production.
5. Being taxation on the expenses, it is regressive in nature. The poor are more affected by this as they incur more expenses compared to the rich. 

VAT Rates in India

The VAT Rates in India differ based on the type of goods and from one State to another. Thus, it is important for the Entrepreneur to be aware of the State’s VAT regulation. However, VAT Rates in India can be categorized into 3 main parts, which have uniformity in many States.

NIL VAT Rate

In many states, the items sold by the unorganized sector in natural or unprocessed format, and basic goods for the poor are listed under the VAT exemption category. Some of the items capable of availing VAT exemptions in many States include-

• Aids used by handicapped persons,
• Glass or plastic bangles,
• Condoms,
• Firewood,
• Khadi,
• Salt, etc.

1% VAT Rate

In many states, 1% / 2% VAT rate is applicable to precious stones, metals like silver, gold, and platinum, bullions, jewellery, etc.

4% or 5% VAT Rate

Many states have adopted a VAT rate of 4% or 5% over a large number of products related to basic necessities. Some of the goods included in this category in many of the States including coffee, coir, cotton, edible oils, medicines, drugs, agricultural implements, etc.

General VAT Rate

In addition to the above VAT Rates, many states also have other VAT levels that rely upon the Goods. Very high VAT Rate of over 20% is generally levied for goods such as imported liquor, cigarettes, etc. Many states have a VAT rate of around 12.5% applicable to the goods which cannot be categorized under any of the previous heads. These categories of goods not falling in any of the other categories are usually taxed at 12.5% / 14% / 15% depending on the State levying it.

VAT on imports and exports

Customs Duty

Customs duty is the tax levied on the importation and exportation of a good or goods to or from India. The government uses this duty to generate its revenues, safeguard domestic industries and regulate the movement of goods in the economy.

The rate of customs duty varies based on the place of the production of a particular good and the purpose of its production.

The following are the different types of customs duty:

1. Basic customs duty – this duty is imposed on the value of the goods at a specific rate. The duty is fixed at a specified rate on an ad-valorem basis, i.e. its imposition is based on the transactional or proprietary value and is imposed during the time of transaction. The Central Government is entitled to the right of exempting any goods from the tax.
2. Countervailing duty – This duty is imposed by the Central Government when a Country is subsidizing the exporters who are exporting goods to India. This amount of duty equals the subsidy paid by them.
3. Additional Customs Duty – For equalizing the imports with local taxes like service tax, VAT and other domestic taxes, a special countervailing duty is imposed on imported goods. Hence, is imposed to bring imports on an equal track with the goods produced or manufactured in India. This is to promote fair trade & competition practices in our country.
4. Safeguard duty – For safeguarding the domestic industries from the effects of imported goods, the Government imposes safeguard duty on certain imported items. This tax is collected on the basis of the loss incurred by the domestic/ local industries.
5. Anti-dumping Duty – Often, large manufacturers from abroad may export goods at very low prices compared to the prices in their domestic market. Such dumping is often intended towards crippling the domestic industry or to dispose of the excess stock. This is known as goods dumping. 

For the prevention of these sorts of dumping activities, the Central Government can impose anti-dumping duty up to the margin of dumping on certain items, under Section 9A of Customs Tariff Act, if the dumped goods are being sold at a lesser price than its normal value. Levy of such anti-dumping duty is allowed as per the agreement under the World Trade Organization. Anti-dumping action can be taken solely if there is an Indian industry producing a resembling form of good.

Imports

Usually, goods are imported into India after the payment of the customs duty. Therefore VAT is inapplicable on imported goods until and unless such goods are being sold in the Indian Market.

For example – Mr Rajan, a resident of Tamil Nadu, imports a smartphone into India from the U.S.A, priced at Rs 30,000 INR. Now for the smartphone, if there is a customs duty of 20% then Mr Rajan shall have to shell out 36000 INR. However, if he wants to resell the smartphone in the market of his State where the VAT rate is 15 %, the selling price will amount to 41,400 INR. 

Exports

No VAT is charged on the exportation of goods from India as Customs duty is already levied on the products being exported outside India.

For example, If Mr Singh decides to export 10 kg of apples to the United Kingdom which costs a nominal price of 120 INR/ Kg then the price shall amount to 1200 INR. Now if there is a customs duty of 5 % on such export then the price shall amount to 1260 INR which he shall have to pay the customs. Here, no VAT shall be imposed on the apples as they are not going to be sold in the Indian Market. 

Conclusion

The VAT Act of all the states prescribes certain limit of annual turnover. If the annual turnover of the dealer exceeds the prescribed threshold limit, then he is required to register himself under VAT. The threshold limit varies from State to State.

Also, Registration may be done voluntarily or compulsorily. A dealer may choose to be voluntarily registered as he will then be allowed to avail the benefit of Input Tax Credit (ITC).

If the dealer is liable to register himself under VAT but fails to get himself registered then the competent authority after conducting the survey, inspection or inquiry may on its motion proceed for the registration of the concerned dealer.

The Act also prescribes for the relaxation available to the small dealers and the one opting Composition Scheme.

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In this blog post, Balaji AG, a qualified ACA, ICWA, ACS and CIMA (UK) Industry Consultant and a CFO of a Listed Company for over five years, and who is currently pursuing his Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the International Financial Reporting Standards as a legal source in India. 

Background

Companies Act, 1956/2013 provides the basic requirements relating to financial reporting of all companies incorporated under the act. Under the Companies Act 1956, every profit & loss account and balance sheet shall comply with the accounting standards.  Accounting standards are issued by the Institute of Chartered Accountants of India (ICAI). Securities and Exchange Board of India (SEBI) protects the investors and regulates the securities market.  Listed companies are required to comply with the various provisions of the listing agreement issued by SEBI.  Listing agreement provides for compliance with accounting standards issued by ICAI.

The Insurance Regulatory and Development Authority (IRDA) regulates financial reporting requirements of Insurance Companies.  Insurance Companies and their auditors are required to comply with the requirements of the IRDA regulations of 2002 “Preparation of Financial Statements and Auditor’s Report of the Insurance Companies”.  IRDA regulations require compliance with the accounting standards issued by ICAI.

The Reserve Bank of India (RBI) is the central bank of India.  The Banking Regulation Act, 1949 empowers the RBI to regulate the financial reporting of entities in the financial sector like banks, financial institutions, etc.  RBI has issued circulars requiring banks to comply with the accounting standards issued by ICAI.

From the above, it is clear that the accounting standards issued by ICAI need to be complied with when preparing financial reporting statements of incorporated companies, banks, insurance companies, etc.

ICAI set up the Accounting Standards Board (ASB) in 1977 to prepare accounting standards. ICAI became one of the associate members of the International Accounting Standards Committee (IASC) in June 1973.  ICAI also became a member of the International Federation of Accountants (IFAC) since its inception in October 1977. While formulating accounting standards in India, the ASB considers International Financial Reporting Standards (IFRS) and tries to incorporate them in the accounting standards issued by it to the extent relevant, in the light of laws, customs, practices, business environment prevalent in India

Convergence Process of IFRS in India

India opened up its doors for international investments to flow in the year 1991.  As businesses expand across borders, they are increasingly recognizing the benefits of having a commonly understood financial reporting framework, supported by strong globally accepted standards. The benefits are numerous and include:

• Greater comparability of financial information for investors;
• Greater willingness on the part of investors to invest across borders;
• Lower cost of capital;
• Higher economic growth etc.,

However, before these benefits can be fully realized, there must be greater convergence to a single set of globally accepted high-quality accounting standards.  International convergence is a goal that is embraced in the mission of the International Federation of Accountants (IFAC) and shared by IFAC members.

ICAI being a member of IFAC since its inception has recognized in its Preface to the Statements of Accounting Standards that:

“ICAI, being a full-fledged member of the International Federation of Accountants (IFAC), is expected, inter alia, to actively promote the International Accounting Standards Board’s (IASB) pronouncements in the country to (or “intending to”)  facilitate  global harmonization of accounting standards. Accordingly, while formulating the Accounting Standards, the ASB will give due consideration to International Accounting Standards (IASs) issued by the International Accounting Standards Committee (predecessor body to IASB) or International Financial Reporting Standards (IFRSs) issued by the IASB, as the case may be, and try to integrate them, to the extent possible, in the light of the conditions and practices prevailing in India”.

The accounting standards issued by ICAI are by and large in conformity with the IFRSs. The Council of ICAI at its 259^th Meeting held in May 2006 expressed the view that the IFRS may be adopted in totality at least for listed and large entities.  The Accounting Standards Board of ICAI, at its 127^th meeting held in August 2006 considered the matter and supported the council’s view that there would be several advantages of converging with IFRS.

The Board decided to constitute a Task Force to prepare the Concept Paper on Convergence with IFRSs with the objective of exploring:

• the approach for achieving convergence with IFRSs, and
• (ii) laying down a road map for achieving convergence with IFRSs to (or “intending to”) make India IFRS-compliant.

Under the concept paper issued in October 2007, the convergence strategy proposed was that IFRSs should be adopted for public interest entities such as listed entities, banks and insurance entities and large-sized entities from the accounting periods beginning on or after the 1st of April 2011.  In respect of entities other than public interest entities (termed as ‘small and medium-sized entities’ (SMEs)), a separate standard for SMEs may be formulated based on the IFRS for Small and Medium-sized Enterprises when finally issued by the IASB, after modifications, if necessary.

Convergence proposed under the concept paper means adoption of IFRS with additional disclosures that are considered necessary for the local environment or removal of an optional treatment, where necessary.

The format of converged accounting standard proposed under the concept paper was that IFRSs should be issued as Indian ASs, which would be considered IFRS-equivalent. To facilitate reference to the existing Indian Accounting Standards, along with the IFRS number, in the brackets, the existing Accounting Standard number may also be given.

ICAI made a public commitment of convergence to IFRS before the 31^st of December 2011. This announcement leads to the government announcing the same commitment of converging by the end of 2011 a year later from the announcement by the ICAI. Even during its inception, the aim of convergence was not to fully conform to IFRS but rather to modify the standards for acclimatization to India’s business environment. Factors such as the legal and regulatory environment, economic conditions, industry preparedness and practice as well as the removal of some options permitted under IFRS were implemented to create a sense of compromise between IFRS and the way business is done in India.

IFRS converged Indian Accounting Standards Implementation

Indian Accounting Standards (IND-AS) were issued by the Accounting Standards Board of ICAI.  The IND- AS are named and numbered in the same way as the corresponding International Financial Reporting Standards(IFRS).  National Advisory Committee on Accounting Standards (NACAS) constituted under Section 210A of the Companies Act, 1956 recommend these standards to the Ministry of Corporate Affairs (MCA).

The Ministry of Corporate Affairs notified these standards on February 25, 2011.  The Press note issued in this regard indicated “In pursuance of G-20 commitment given by India, the process of convergence of Indian Accounting Standards with IFRS has been carried out in Ministry of Corporate Affairs through the wide-ranging consultative exercise with all the stakeholders. Thirty-five Indian Accounting Standards converged with the International Financial Reporting Standards (henceforth called IND-AS) are being notified by the Ministry and placed on the website.  These are: IND ASs 1, 2, 7, 8, 10, 11, 12, 16, 17, 18, 19, 20, 21, 23, 24, 27, 28, 29, 31, 32, 33, 34, 36, 37, 38, 39, 40, 101, 102, 103, 104, 105, 106, 107 and 108. The Ministry of Corporate Affairs will implement the IFRS converged Indian Accounting Standards in a phased manner after various issues including tax related issues are resolved with the concerned Departments. It would be ensured that the implementation of the converged standards in a phased manner is smooth for the stakeholders. The Ministry will notify the date of implementation of the IND AS at a later date”.

2013 saw the Indian government adopting a new Companies Act to facilitate the various new provisions convergence to IFRS required. To resolve issues of tax, the Ministry of Finance drafted Tax Accounting Standards to account for the conflicts between accounting and taxation.

Central Government through notification dated 16 February 2015, in exercise of the powers conferred by Section 133 read with section 469 of the Companies Act, 2013 and sub-section (1) of Section 210A of the Companies Act, 1956, in consultation with the National Advisory Committee on Accounting Standards, has issued the Companies (Indian Accounting Standards) Rules, 2015 which lay down a roadmap for companies other than insurance companies, banking companies and non-banking finance companies (NBFC) for implementation of IND-AS converged with IFRS. The Rules would come into force from the 1^st day of April 2015.

It is also applicable to holding, subsidiaries, joint ventures, or associates of companies covered above from the respective year.

On the 18^th of January 2016, the MCA issued a road map for the applicability of IND-AS for banking companies, Insurance Companies, and NBFCs.  Banks, Financial Institutions, Insurance companies and NBFCs with a net worth of over Rs. 500 crores are required to prepare financial statements under the IND-AS for accounting periods beginning from 1^st April 2018.

In this blog post, Disha Mohanty,  a student pursuing her LL.B (5th year) from National Law University, Odisha and a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, lists the responsibilities of foreign directors in a foreign company. 

Introduction

With the onset of the Companies Act 2013, there is a paradigm shift concerning what will construe as the requisite requirements for the appointment of a director in keeping with the responsibilities ascertained therein with a foreign company, in concurrence with the RBI approval based requirements devised through FDI compliance. The requirements to be complied about foreign companies will be applicable only for the foreign companies which fulfill the terms stated[1] under Section 379[2] of the companies act as per Chapter XXII. In case of absence of a foreign director, an alternate director (who must be a resident Indian) can take his/her place for not more than three months.

The Board of Directors

It must be stated at the very beginning that it is mandatory for every foreign company in India to have at least one Indian director on board,[3] who must reside in the country for at least one hundred and eighty days in the previous year[4], so as to enable compliance with the statutory requirements due to the previously common practice of all the directors being stationed outside India and hence, resulting in compliance issues? The section also includes the mandatory requirement for having a female director on board. It is also necessary for every foreign company to file Form FC-1 preferably within 30 days from the date of commencement of business in India, which must include a declaration stating that the director has not been debarred from running a business in India and abroad[5]. While the foreign director will require getting a Digital Signature and Director Identification number in keeping with the Indian provisions, in addition to the approval acquired from the respective embassy consuls, however, it is not mandatory to acquire a PAN for the same. Additionally, unlike the Indian rule, foreigners won’t require a proof of their father’s name for the documents as mentioned above

Additionally, it may also be mentioned herein, that the range of companies coming under the category of Foreign companies has notably increased with the most specific relevant addition being that of including businesses being carried out in the electronic mode also being included under the ambit of the Companies Act, even if the main server is not located in India, considering the number of e-commerce portals which are plying in India within the past decade, in reference to Rule 2(c)[6] which requires any business having a place of business in India to register therein and accordingly  comply with the financial requirements and reporting compliances[7] .

Duties of the Board of Directors

It must be noted that though directors can exercise the option to attend board meetings via video conferencing, it is necessary for every director to attend at least a meeting physically in person, for every 12 months.[8] Also while the requirements for the requisite number of directors remain the same for foreign companies as in India, this privilege does not extend to foreigners opening a One Person Company, which requires only one director.[9] It must be noted that foreign companies post the 2013 amendment can engage in mergers with Indian companies.

Directors in foreign companies also have to file accordingly a Director Responsibility Statement which states that the director has accordingly devised a system to ensure the compliance of the company concerning the applicable laws which should be operating efficiently and must be adequate reasonably.

It is also additionally the director’s responsibility to ensure that that in cases wherein the net worth of the company is more than Rs 500 crores, or if the turnover is exceeding Rs 1000 crores, or has a net profit exceeding Rs 5 crores the company must constitute a Corporate Social Responsibility Committee (two members, one of whom must be a resident director) who must accordingly devise CSR policies and implement them, utilizing at least 2% of the average net profit made by the company in question in the preceding three financial years in accordance with the terms of the CSR policy. This rule is applicable only to those foreign companies which have business operations in India. It is necessary to mention the actions and utilization of monetary resources as per the policy must be mentioned in the annual report.

The directors are bound by the same responsibilities as their Indian counterparts concerning declarations about Related Party Transactions. It is also necessary for the directors to ensure that the activities undertaken by the company are strictly within the purview of those activities approved by the RBI and are in compliance with the terms and conditions mentioned in the approval, which is to be issued by the appointed Chartered accountant of the company by means of the Annual Activity Certificate. Foreign companies are on the whole permitted a limited list of activities in concurrence with the restriction that allows only those activities which are undertaken by the parent company

With regard to raising capital of the company publicly,  it would require issuing of a prospectus in keeping with Rule 11[10], with the directors treating the prospectus for all purposes to be an Indian prospectus.

It is also the responsibility of the foreign director to file the annual returns of the foreign company namely FC-4 as per Section 389 of the Act, [11]within sixty days from the last day of its financial year with a requisite fee to the Registrar of the Company (RoC)[12].  The director also has the responsibility to ensure compliance with the audit requirements applicable especially if the company is about to undergo liquidation or wind-up and subsequently must notify the authorities pertaining to the ceasing of the existence of the company, in addition to approving the balance sheet and profit and loss account of the company.[13]

In accordance with the fact that the prospectus of a foreign company here will be treated as if issued by an Indian company, it is the director’s responsibility to ensure compliance with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 with regard to declaration of material contracts disclosing details pertaining to the remuneration/appointment of the director two year prior to the issuing of the prospectus in addition to the other requirements pertaining to IDR. Disclosure of interest also extends to foreign directors as a responsibility owed towards their company. It is also their duty to partake in the responsibility pertaining to the preparation of annual reports which must include the grounds mentioned under business responsibility reporting if the company in questions is within the top 100 companies by market capitalization[14]. It is also the responsibility of the director to register the charges on the property regardless of whether it is located in India or outside.[15]

Considering that foreign companies are also subject to the same norms for debentures, it is the director to ensure the compliance with Indian law. With regard to remittance of profits, it is the director’s responsibility to ensure the remittance only after the payment of the applicable taxes as per Indian law.

Further concerning mergers, foreign companies are permitted to merge with Indian companies; this would bring the company in questions within the ambit of the Competition Act, subject to MoU based on Central Government approval. And accordingly, make it the director’s liability subject to his/her involvement with the merger in question. If a company is incorporated in Singapore, then it is a necessity to ensure that at least one director of Singaporean nationality be on the board of the company in India. Languages, however, will at no point serve to be a barrier to the appointment of the foreign director in the company.

It is also the director’s responsibility to ensure the compliance with the laws of the country where the company has been incorporated and according to whose laws the articles of association and memorandum of the association have been drafted accordingly, and in general has a fiduciary duty to the company. Non-compliance with the responsibility as mentioned above will lead to the liability falling on the director as per Indian provisions.

In general, while foreign directors have a responsibility to ensure compliance with the laws of their parent company’s country and Indian laws. Concerning Indian laws, the emphasis is primary in relation to tax compliance, and primary company bye-laws pertaining to the functioning of the country which in addition to company law includes the relevant labor, employment laws, based on the activities of the company and intellectual property laws compliance. The emphasis lies on procedural compliance especially with compliance and maintaining that the activities undertaken by the company are strictly those which are permitted and with prior approval. On the whole, while the laws in question place a considerable amount of increased liability on the director in question, which is necessary to ensure at least a particular degree of business responsibility and increased compliance with Indian procedural requirements.

Footnotes:

[1] http://www.arkayandarkay.com/registration-of-foreign-companies/

[2] Section 379, Companies Act 2013

[3] Section 149(3), Companies Act 2013

[4]http://www.mondaq.com/india/x/284280/Corporate+Governance/Directors+under+Companies+Act+2013+is+it+old+wine+in+new+bottle

[5] http://taxguru.in/company-law/foreign-company-establishment-compliances-companies-act-2013.html

[6] http://taxguru.in/company-law/foreign-companies-companies-act-2013.html

Rule 2 (c), Companies (Registration of Foreign Companies) Rules, 2014

[8]http://www.mondaq.com/india/x/435008/Corporate+Commercial+Law/Key+Provisions+In+The+Companies+Act+2013+Affecting+The+Foreign+Residents+Doing+Business+In+India

[9] Supra n. 5

[10] Companies (Registration of Foreign Companies)  Rules, 2014

[11] http://www.mca.gov.in/MCA21/dca/help/instructionkit/NCA/Form_FC-4_help.pdf

[12] Annexure to Companies (Registration Offices and Fees) Rules, 2014

[13] http://www.samvadpartners.com/wp-content/uploads/2013/06/Roles-Responsibilities-and-Liabilities-of-Directors-in-India.pdf

[14] http://economictimes.indiatimes.com/markets/stocks/earnings/companies-act-from-now-on-annual-reports-wont-be-about-just-numbers/articleshow/49252759.cms

[15] http://www.charteredonline.in/2016/06/foreign-company-under-companies-act.html

In this blog post, Sunidhi, a student of the Rajiv Gandhi National University of Law, Patiala has written about the legality of the use of hands-free device or Bluetooth for taking calls while driving in India.

Introduction

Every year, nearly 1.4 million people have been killed because they are wireless customers and their over-bearing habit of using cell phones while driving. In India, an estimated 1.35 lakhs people died due to road accidents in 2010, which is approximately 10% of road accident fatalities worldwide and these figures are the highest in the world.[1]

India has the highest number of road accidents in the world. India has earned a dubious identity with over 1,30,000 road accidents in a year. India has overtaken China in the tally of the worst road mishaps.

Section 184 read with Section 177 of the Motor Vehicles Act, 1988 prohibits the use of the phones while driving and makes it a punishable offense with a term of six months or with a fine. It has not been expressly stated in the Act; therefore, an executive order was passed for the same.

Why is talking on the phone an offense?

One out of four road accidents is caused due to distractions caused by mobile phones. Today, the use of mobile phones has become a great trouble. People talk on the phone while driving; this distracts them, and they drive recklessly. This leads to increased road accidents as the whole of India has access to mobile phones today.

The act of talking on the phone distracts the mind. The larger portion of the brain concentrates on the phone and lesser portion on the driving. The result is that the concentration of the human brain is diverted from the road. The brain fails to take timely and logical action. Hence, the number of road accidents or crashes has increased. The main reason for penalizing this offense is to avoid brain distractions to keep a control on the number of ever increasing road accidents in India.

According to Indian Police

“Don’t talk on the phone while you’re driving; the police say it’s a crime. Any form of cell phone use is forbidden,” says BK Upadhyay, Joint Commissioner (Traffic), Mumbai. The police say that although the legal system of India is technologically a little behind, but this practice of punishing those found using mobile phones, in any way, is justified because it is for the welfare of the public only. This practice is to bring the road accidents under control. This practice if followed in many states of India such as Maharashtra.[2]

Is it legal to talk on hands-free device or Bluetooth?

According to Section 184 of the Motor Vehicles Act, 1988, whoever drives a vehicle in a manner that is dangerous to the public shall be held liable for such act of recklessness. Section 177 of the said Act describes the punishment for this offense. The punishment for this may be a term of six months or fine up to Rs 1000. In the case of second-time offenders, the maximum fine charged is Rs 3,000 and a term extending up to 2 years.

The reason behind this law is to stop the use of mobile phones while driving because the use of mobile phones distracts the brain. The brain loses its ability to understand the situation and take timely action when suddenly another vehicle, person or animal appears before the driver. Therefore, it does not matter whether the distraction caused by the mobile phone was because of holding a handset, using Bluetooth or wearing the earphones.

The intention for this enactment was to stop the drivers from recklessly driving their vehicles. However, the law does not specifically say that use of Bluetooth or hands-free is prohibited. This is the gray area of law but reading the law with the intention of its legislation, it can easily be concluded that the use of Bluetooth or hands-free cell or reading and sending text messages is strictly prohibited, as allowing it will defeat the provisions of the law.

Anything that is not legal is illegal. The provisions of Section 184 of the Motor Vehicles Act, 1988 specifically prohibits driving in a manner that is dangerous to public safety. The use of cell phones, in any way, either as a handset or hands-free cell, is dangerous to public safety, and many studies have proved this. One such study has been quoted above. Therefore, by applying the analogies, it can be observed that use of cell phones, whether as a handset or hands-free device is illegal.

The Law Commission of India in 2009 suggested that the 28 years old law should be amended to meet the needs of the changing scenario. It should specify that whether hands-free devices can be used or not while driving. However, there is no restriction on the use of mobile phone in any form whether handset or hands-free device by the other occupants of the vehicle.

The law, therefore, on the use of hands-free device or Bluetooth while driving forms part of the gray area of the Indian Motor Vehicles Act, 1988. This issue will remain debatable until the time a specific law is enacted concerning this.

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Footnotes:

[1] Mobile Phone Accidents – Experience Of India, The Journal of Transport and Telecommunication Institute,Volume 13, Issue 3 (Jan 2012).

[2] Available at http://www.dnaindia.com/mumbai/report-is-handsfree-cell-talk-a-traffic-offense-2039068.