Weekly Round-up on Tax and Corporate Laws | 14th to 19th October 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from October 14th  to 19th, 2024, namely:

1. CBDT issued revised guidelines for compounding of offences under Income-tax Act;
2. CBIC clarifies issues regarding implementation of provisions of section 16(5) & 16(6) of CGST Act, 2017;
3. CBIC issued clarification of various doubts related to Section 128A of the CGST Act, 2017;
4. GSTN Update on GSTR-9/9C: Auto population of eligible ITC from GSTR-2B;
5. SEBI introduces Liquidity Window to boost early redemption of debt securities; and
6. ICAI introduces new audit quality management standards: SQM 1 and SQM 2.

1. CBDT issued revised guidelines for compounding of offences under Income-tax Act

In line with the Hon’ble Finance Minister’s budget announcement on simplifying and rationalising the compounding procedure, the Central Board of Direct Taxes (CBDT) issued new Guidelines for Compounding of Offences under the Income-tax Act, 1961 (the Act).

These guidelines have been issued in supersession of all previously issued guidelines for the compounding of offences, which are as follows:

• Guidelines issued via letter dated 16.05.2008.
• Guidelines issued via letter dated 23.12.2014.
• Guidelines issued via letter dated 14.06.2019.
• Guidelines issued via letter dated 16.09.2022.

The new guidelines have been simplified by, among other changes, eliminating the categorization of offences, removing the restriction on the number of applications, allowing fresh applications upon rectifying defects (which was previously not allowed), permitting the compounding of offences under sections 275A and 276B of the Act, and removing the 36-month time limit for filing applications from the date of the complaint.

Additionally, the new guidelines permit companies and HUFs to file applications without the main accused. Both the main and co-accused can now have their offences compounded upon payment of the relevant charges by either party.

Moreover, compounding charges have been rationalized by abolishing interest on delayed payments and reducing the rates for offences, such as TDS defaults, to a uniform rate of 1.5% per month. The calculation of compounding charges for non-filing of returns has been simplified, and separate compounding fees for co-accused have been removed.

The new guidelines will apply to all applications submitted after issuance of the guidelines, i.e., 17-10-2024, and to applications submitted under earlier guidelines that have not yet been disposed of yet.

The compounding application can be filed suo-moto at any time after the offences occur, regardless of whether it has come to the Department’s notice. It may also be submitted after prosecution proceedings have commenced.

For applications pending as of 17-10-2024, if compounding charges have already been determined and communicated but remain unpaid in full, the charges shall be recalculated if they are lower under the new Guidelines. However, no refunds or adjustments against other dues will be provided if the higher charges determined under the previous Guidelines have already been paid.

Further, a person may refile an application under the new guidelines if his previous application was rejected due to curable defects, such as:

• Non-payment of outstanding tax, interest, penalty, or related sums,
• Filing the application in the incorrect format,
• Mentioning the wrong assessment year/financial year or section under which the offence has been committed,
• Non-payment or short payment of compounding charges,
• Failure to submit an undertaking regarding the withdrawal of appeals, etc.

However, applications rejected on merits by the Competent Authority in the past will not be reconsidered under the new guidelines.

Read the Notification

2. CBIC clarifies issues regarding implementation of provisions of section 16(5) & 16(6) of CGST Act, 2017

The CBIC has issued circular to clarify the issues regarding implementation of provisions of sub-section (5) and sub-section (6) in section 16 of CGST Act, 2017. Notably, these provisions are inserted in section 16 of the CGST Act, with effect from the 1st July, 2017, vide section 118 of the Finance (No. 2) Act, 2024, whereby the time limit to avail input tax credit under provisions of sub-section (4) of section 16 of CGST Act has been retrospectively extended in certain specified cases.

Thereafter, various representations have been received by CBIC from trade and industry requesting clarification in respect of various issues pertaining to the availing of the benefit of the said amendments in section 16 of the CGST Act to the taxpayers against whom demands have been issued. This circular also explains the procedure of filing an application for rectification of an order issued under section 73 or section 74 of the CGST Act. In this regard, Circular No. 237/31/2024-GST dated 15th October, 2024 has been issued.

Read the Circular

3. CBIC issued clarification of various doubts related to Section 128A of the CGST Act, 2017

The CBIC has issued circular to clarify doubts and ensure uniformity in the implementation of Section 128A of the CGST Act, 2017. The circular also provides guidelines relating to filing of application, payment of tax etc. for waiver of interest or penalty or both under Section 128A. Notably, Notification No. 20/2024-Central tax dated 8^th October 2024, has provided the procedure and conditions for closure of proceedings under section 128A of CGST Act. In this regard, Circular No. 238/32/2024-GST dated 15th October, 2024.

Read the Circular

4. GSTN Update on GSTR-9/9C: Auto population of eligible ITC from GSTR-2B

The GSTN has issued an update to inform that the GST system will auto-populate eligible ITC for domestic supplies (excluding reverse charge and imports ITC) from table 3(I) of GSTR-2B to table 8A of GSTR-9. These changes in GSTR-9 and 9C for the FY 2023-24 will be available on the GST portal from 15th October 2024 onwards.

Further, a validation utility will be executed progressively (for validation by taxpayers) to complete the auto-population of GSTR-9 from GSTR-2B for April 2023 till March 2024. In this regard, a GSTN Update dated October 15th, 2024, has been issued.

Read the GSTN Update

GSTR-9 and GSTR-9C Returns – Essential Compliance Guidelines and Submission Deadlines

5. SEBI introduces Liquidity Window to boost early redemption of debt securities

SEBI, vide Circular dated October 16, 2024, has introduced the ‘Liquidity Window’ facility for investors in debt securities via a stock exchange mechanism. This framework, governed by Regulation 15 of the SEBI (NCS) Regulations, 2021, aims to enhance liquidity in the corporate bond market, especially for retail investors. The Liquidity Window facility can be provided only for prospective issuances of debt securities through a public issue process or on a private placement basis. The circular shall be applicable on and from November 1, 2024.

(a) Meaning of ‘Liquidity Window Facility’

A ‘liquidity window facility’ refers to a mechanism provided by the issuer of financial instruments, such as debt securities, to offer investors the option to sell or redeem their holdings before maturity. The facility usually involves a put option, which gives investors the right to sell their securities back to the issuer during specified intervals (e.g. monthly or quarterly). This mechanism enhances investor confidence by providing a way to exit the investment under predefined conditions.

(b) Need for this amendment

On August 16, 2024, SEBI issued a draft Circular seeking public comments on proposals to introduce a liquidity window facility for investors in debt securities via a stock exchange mechanism. The corporate bond market serves as a critical source of funding for the issuers while providing an investment avenue for the investors. SEBI has undertaken various measures to widen the investor base and encourage participation and transparency in the corporate bond market. One of the factors that drives investor participation in a market is the availability of liquidity. A low level of secondary market transactions in corporate bonds has resulted in the corporate bond market being perceived as illiquid. To address the liquidity issue for investors, especially retail investors, and pursuant to discussions with issuers/potential issuers of debt securities, a need was felt to establish a framework for providing a liquidity window facility by issuers.

(c) Introduction of ‘Liquidity Window Facility’ for investors to boost early redemption of debt securities

SEBI has introduced a Liquidity Window facility for debt securities, allowing issuers to offer put options for investor redemption prior to the maturity date. This framework, governed by Regulation 15 of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, aims to enhance liquidity in the corporate bond market, especially for retail investors. The issuers can give investors put options that are exercisable on pre-specified dates or intervals. The put option allows investors to redeem debt securities before their maturity date.

(d) Discretion of Issuer to provide a ‘Liquidity Window Facility’ for debt securities on an ISIN basis

An entity issuing debt securities that are proposed to be listed may, at its option/discretion, provide the liquidity window facility for the debt securities on an ISIN basis at the time of issuance of debt securities and make such facility available to eligible investors.

(e) Eligibility of investors to avail of ‘Liquidity Window Facility’

The issuer must specify the eligibility of investors who can avail of the Liquidity Window facility, i.e. whether the facility shall be available to all investors in the debt securities or only to retail investors in the debt securities. Eligible investors desirous of availing of the liquidity window facility must hold the debt securities in demat form.

(f) Period of ‘Liquidity Window’

The liquidity window must be kept open for 3 working days and may be operated on a monthly/quarterly basis at the discretion of the issuer. The schedule of the liquidity window must be disclosed upfront in the offer document. The notice/information regarding the liquidity window through the put option must be made within 5 working days via SMS/WhatsApp messaging from the start of each financial year, informing investors about the availability of this facility on a monthly/quarterly basis for that financial year.

(g) Valuation and Settlement Process for debt securities during liquidity window

Debt securities must be valued on ‘T-1’ day, where T is the first day of the liquidity window. Such valuation must be displayed at all times during the period of liquidity window on the website of the Issuer and Stock Exchanges. The issuer must ensure that the amounts payable to the investor must not be at a discount of more than 100 basis points on the valuation arrived plus the accrued interest. Further, the settlement of debt securities must be on ‘T+4’ day, where T is the first day of the liquidity window.

(h) Reporting and Disclosure Requirements

The issuer must, within 3 working days of the closure of the liquidity window facility, submit a report to the stock exchanges where such debt securities are listed in the form, manner and substance as the stock exchange may specify in consultation with the SEBI. Further, the issuer must inform the depositories and debenture trustee regarding debt securities to be extinguished within 3 working days from the end of the timeline (i.e. within 45 days of closure of the liquidity window facility or before the end of the relevant quarter, whichever is earlier).

Conclusion

The introduction of a liquidity window facility aims to enhance investor confidence and improve liquidity in the corporate bond market, particularly benefitting retail investors. By providing a structured mechanism for early redemption through put options, the framework ensures greater flexibility and access to funds before maturity. The facility, governed by SEBI regulations, encourages participation, promotes transparency and helps to create a more active and accessible debt market.

Read the Circular

6. ICAI introduces new audit quality management standards: SQM 1 and SQM 2

The Institute of Chartered Accountants of India (ICAI) has introduced two significant standards—SQM 1 and SQM 2—designed to enhance the quality management framework for audits, reviews of financial statements, and other assurance services.

SQM 1 sets out the responsibilities of audit firms in establishing, implementing, and operating a robust quality management system. It applies to all firms conducting audits, reviews, or assurance engagements. The standard outlines specific policies and procedures that firms must follow to ensure consistency, quality, and reliability in these engagements. Whereas, SQM 2 focuses on the role of the Engagement Quality Reviewer (EQR), detailing the criteria for appointment, eligibility, and responsibilities. It ensures that an experienced individual independently reviews the work done in engagements requiring quality review as specified in SQM 1. The role of the EQR includes reviewing the engagement team’s significant judgments, decisions, and the final output to verify compliance with audit standards.

Implementing these standards is recommendatory from April 1, 2025, and will become mandatory by April 1, 2026. During this transition period, firms are encouraged to integrate these changes and ensure that their quality management systems are aligned with the new requirements. Until the mandatory date, existing standards such as SQC 1 will remain applicable.

Read the Story