Weekly Round-up on Tax and Corporate Laws | 16th to 21st December 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from December 16^th to 21^st, 2024, namely:

1. Key recommendations from the 55th GST Council meeting announced by Government;
2. Bitcoin was capital asset before 01.04.2022; LTCG on sale of Bitcoin eligible for Sec. 54F exemption: ITAT;
3. Multi-factor authentication on E-Invoice and E-Way Bill portals will be mandatory for all taxpayers & users from 1st April 2025;
4. GSTN issued an advisory for RR No./eT-RRs Entry in the EWB System;
5. SEBI Board approves SME IPO norm changes; mandates ‘Rs. 1 crore’ operating profit in 2 of 3 preceding years for DRHP filing; and
6. NFRA issues inspection reports on two audit firms, highlights deficiencies and recommends enhanced compliance and quality control.

1. Key recommendations from the 55th GST Council meeting announced by Government

The 55th GST Council meeting has been held under the Chairpersonship of Union Minister for Finance & Corporate Affairs Smt. Nirmala Sitharaman in Rajasthan. The GST Council’s recent recommendations introduce key reforms and compliance updates aimed at streamlining tax processes and reducing business costs. These include a retrospective amendment in Section 17(5)(d) of the CGST Act, 2017, replacing “plant or machinery” with “plant and machinery” from 01.07.2017, which nullifies the Supreme Court’s Safari Retreats ruling and significantly impacts the construction sector. The removal of reverse charge on sponsorship services and reduced cess for merchant exporters will lower costs and enhance global competitiveness.

Further, trade facilitation measures include clarity on voucher taxation, GST exemption for small transaction fees by payment aggregators, simplified registration for small businesses, and the exemption of GST on penal charges by banks and NBFCs for non-compliance with loan terms.

Additionally, the GST on the sale of old and used vehicles, including EVs (except specific categories), will increase from 12% to 18%. The inclusion of the Input Matching System (IMS) in GST legislation marks a significant shift in compliance dynamics, requiring businesses to evaluate its impact carefully. These changes reflect a balance between easing compliance burdens and optimizing revenue generation.

Further, it is clarified that ready-to-eat popcorn mixed with salt and spices, classifiable under HS2106 90 99, attracts 5% GST if supplied as other than pre-packaged and labelled and 12% GST if supplied as pre-packaged and labelled. However, when popcorn is mixed with sugar, changing its character to sugar confectionery (eg caramel popcorn) would be classifiable under HS 1704 9090 and attract 18% GST.

Read the Press Release

2. Bitcoin was capital asset before 01.04.2022; LTCG on sale of Bitcoin eligible for Section 54F exemption: ITAT

The assessee was an individual and salaried person. The assessee purchased Bitcoin (cryptocurrency) during the financial year 2015-16 and sold it during the financial year 2020-21. He invested sale consideration in the purchase of the property. The assessee filed return declaring long-term capital gain on the sale of Bitcoin and also claimed exemption under section 54F. The Assessing Officer held that the cryptocurrency was not a capital asset under section 2(14) and made it taxable under section 56 as income from other sources.

On appeal, the CIT(A) had held that Crypto Currency (Bitcoins) was not an asset as per section 2(14). Hence, the transfer as per section 2(47) as Long-Term Capital Gain was not applicable in the case of the assessee, and accordingly, he also confirmed the denial of deduction under section 54F to the assessee.

Aggrieved by the order, an appeal was filed to the Jodhpur Tribunal.

The Tribunal held that the plain natural definition of ‘property’ as given in the Act is property of any kind held by an assessee, whether or not connected with his business or profession, in which a person owns something of value. Though cryptocurrency/virtual digital asset is also not a currency, it is not an asset within the meaning of section 2(14). The amendment made in the Finance Act 2022 has defined virtual digital assets (VDA) under section 2(47A), wherein the name given is virtual digital assets.

Thus, considering the plan vanilla meaning before the amendment as is to be understood at the time of purchase & sale of cryptocurrency (bitcoins), which is a right of the assessee attached to the investment made.

If the definition of the capital asset, as outlined in section 2(14), which states that ‘property of any kind held by an assessee, whether or not connected with his business or profession,’ is interpreted in the manner suggested by Explanation 1 to these sections, it becomes evident that ‘property’ encompasses and shall always include any right in or related to an Indian company, including the right of management, control, or any other right whatsoever.

Consequently, all rights are considered property, and therefore, the assessee’s right in Bitcoin, despite being a virtual asset, qualifies as a capital asset under section 2(14). Consequently, the Assessing Officer’s assertion that one must actually own something as property to qualify as a capital asset is incorrect. Even if an individual possesses a right or claim on a property, it is still considered a capital asset under section 2(14).

Further, section 2(47) defines transfer in relation to a capital asset to include the sale, exchange or relinquishment or extinguishment of any right therein. Therefore, in the instant case, the gain on the sale of bitcoin, which the assessee acquired, results in capital gain and is not chargeable under the head income from other sources.

Accordingly, gain on the sale of cryptocurrency was to be taxed under the head capital gain and not under the head income from other sources before the lawmaker made the specific provision in the Act. Since the income on the sale of cryptocurrency is chargeable to tax under the head long-term capital gain, the AO was directed to allow the claim of deduction under section 54F to the assessee.

Read the Ruling

3. Multi-factor authentication on E-Invoice and E-Way Bill portals will be mandatory for all taxpayers & users from 1st April 2025

The GSTN has issued an update to inform that NIC will be rolling out updated versions of the E-Way Bill and E-Invoice Systems effective from 1st January 2025. One of the key changes involves the implementation of Multi-Factor Authentication (MFA). Currently, MFA, which requires login using a username, password, and OTP (sent to the registered mobile number, Sandes app, or similar platforms), is mandatory for taxpayers with an Annual Aggregate Turnover (AATO) exceeding Rs 100 Crores since 20th August 2023.

Now, w.e.f. 1st January 2025, MFA will become mandatory for taxpayers with AATO exceeding Rs 20 Crores, from 1st February 2025 for those with AATO exceeding Rs 5 Crores, and from 1st April 2025 for all other taxpayers and users. Also, the generation of E-Way Bills will be restricted to documents dated within 180 days from the date of generation. For instance, documents dated earlier than 5th July 2024 will not be eligible for E-Way Bill generation starting 1st January 2025.

Furthermore, the extension of E-Way Bills will be limited to 360 days from their original date of generation. For example, an E-Way Bill generated on 1st January 2025 can only be extended up to 25th December 2025. In this regard, a GSTN Update dated December 17th, 2024 has been issued.

Read the GSTN Advisory

4. GSTN issued an advisory for RR No./eT-RRs Entry in the EWB System

The GSTN has issued an advisory to inform that the FOIS of Indian Railways has now been integrated with the E-Way Bill system via Application Programming Interfaces (APIs). Therefore, the taxpayers transporting goods via the Indian Railways FOIS must ensure the correct entry of the number or RR No./eT-RRs in the EWB system. The format for entering RR No./eT-RRs has been standardized to ensure consistency and accuracy.

The taxpayers with a pre-existing E-Way Bill (EWB) for goods transported from the factory to the railway station and who are subsequently transporting goods by rail under FOIS must follow these steps:

• Update Part B of the E-Way Bill using the “Multi-Transport Mode” option on the EWB portal.
• In the updated section, select Rail as the mode of transport.
• After selecting this option, the system will show a prompt to enter the corresponding RR No./eT-RRs

In this regard, GSTN Update dated December 18th, 2024, has been issued.

Read the GSTN Advisory

5. SEBI Board approves SME IPO norm changes; mandates ‘Rs. 1 crore’ operating profit in 2 of 3 preceding years for DRHP filing

The Securities and Exchange Board of India (SEBI), in its 208^th board meeting dated December 18, 2024, approved a series of amendments. These amendments aim to strengthen the regulatory framework, improve transparency and enhance governance across various sectors.

The Press Release (PR No. 36/2024), dated December 18, 2024, highlights the key approvals made by the Board. These include (a) the introduction of stricter norms for SME IPOs to improve transparency and governance, (b) Enhancement of Corporate Governance Norms for ‘High-Value Debt Listed Entities’, (c) Widening of the scope of the definition of UPSI, (d) Recognition of ‘Past Risk and Return Verification Agency’ and (e) Regulated Entities to take full responsibility of ‘AI tools’ and ensure data privacy and security. Some of the key highlights of the SEBI’s board meeting in detail are as follows:

5.1 Introduction of Stricter Norms for SME IPOs

The Board has approved amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, and SEBI (LODR) Regulations, 2015, to enhance transparency and streamline processes for SME IPOs and listings. The amendments are as follows –

• Eligibility for IPO: Issuers can make an IPO only if they have an operating profit (earnings before interest, depreciation and tax) of at least Rs 1 crore from operations in any 2 out of 3 previous financial years at the time of filing the Draft Red Herring Prospectus (DRHP).
• Offer for Sale (OFS) Limits: Selling shareholders in SME IPOs must not exceed 20% of the total issue size, and their sales are limited to 50% of their holdings.
• Promoters Lock-In: Lock-in on promoters’ holdings held in excess of the Minimum Promoter Contribution (MPC) will be released in a phased manner, i.e. lock-in for 50% of promoters’ holding above MPC must be released after one year, and the remaining 50% must be released after two years.
• Cap on General Corporate Purpose (GCP): GCP amounts in SME IPOs must be capped at 15% of the amount raised by the issuer or Rs 10 crores, whichever is lower.
• Restrictions on Loan Repayment: SME issues cannot use proceeds to repay loans taken directly or indirectly from promoters, promoter groups, or related parties.
• Further Issues by SME Companies: SME companies can raise funds without migrating to the main board, provided they comply with the SEBI (LODR) Regulations applicable to main board-listed entities.

5.2 Enhancement of Corporate Governance Norms for High-Value Debt Listed Entities (HVDLEs)

The Board has approved key proposals to enhance corporate governance norms for High-Value Debt Listed Entities (HVDLEs). It includes the following –

• Increased Threshold for HVDLE Identification: The threshold for identifying HVDLEs has been raised from Rs. 500 crores to Rs. 1000 crores to align with Large Corporate thresholds.
• Flexibility in Committee Constitution: HVDLEs will have more flexibility in forming their Nomination and Remuneration Committee (NRC), Risk Management Committee (RMC), and Stakeholder Relationship Committee (SRC).
• Related Party Transactions (RPTs): For debt-listed entities with substantial related party shareholding, material RPTs will require a No-Objection Certificate (NOC) from the Debenture Trustee, who must obtain approval from debenture holders before shareholders’ approval can be sought. This will apply from April 1, 2025.
• Introduction of Voluntary ‘Business Responsibility and Sustainability Report’ (BRSR): A voluntary BRSR requirement will be introduced for HVDLEs, aligning them with good governance practices on par with equity-listed entities.

5.3 SEBI widens the scope of the definition of ‘UPSI’ and introduces threshold limits for identifying events as UPSI

The Board approved amendments to the definition of UPSI under Regulation 2(1)(n) of the SEBI (Prohibition of Insider Trading) Regulations, 2015. The amended definition now includes 17 out of 27 material events, which were previously not covered, in the illustrative list of UPSI.

These events, which are required to be disclosed under Regulation 30 of the SEBI (LODR) Regulations, 2015, are now explicitly defined as UPSI. This change aims to improve the consistency and transparency of the insider trading norms, ensuring a more uniform approach across the ecosystem.

Further, SEBI has introduced threshold limits for identifying events as UPSI, based on the criteria outlined in Part A of Schedule III of the LODR Regulations, 2015.

5.4 Recognition of ‘Past Risk and Return Verification Agency’ to enhance transparency in financial services market

The Board has approved the proposal to recognise a ‘Past Risk and Return Verification Agency’ (PaRRVA), which will verify the risk-return metrics related to the services of persons regulated by the SEBI or their agents. A Credit Rating Agency (CRA) must act as PaRRVA, with a recognised stock exchange serving as the PaRRVA Data Centre (PDC).

Further, PaRRVA must verify risk-return metrics for Investment Advisers (IAs), Research Analysts (RAs), algorithmic Traders and those permitted by the Board to offer these services.

5.5 Regulated Entities to take full responsibility for use of ‘AI tools’ and ensure data privacy and security

The Board approved the proposal to amend certain provisions of SEBI Regulations, including the SEBI (Intermediaries) Regulations, 2008, the SEBI (Depositories and Participants) Regulations, 2018, to require persons regulated by SEBI (including MIIs, registered intermediaries, AMCs, managers of pooled investment vehicles) who use Artificial Intelligence tools, either designed by them or procured from third-party technology service providers, to take full responsibility for their use of such tools. Further, the SEBI-regulated persons must be solely responsible for the privacy, security, and integrity of investors’ and stakeholders’ data.

Read the Press Release

6. NFRA issues inspection reports on two audit firms, highlights deficiencies and recommends enhanced compliance and quality control

The National Financial Reporting Authority (NFRA) has released its 2023 inspection reports for M/s BSR & Co. LLP and M/s Lodha & Co. LLP, shedding light on both improvements and persistent deficiencies in their audit practices.

The report on BSR & Co. LLP reviewed three audit engagements from FY 2022-2023, focusing on high-risk areas such as related party transactions, internal financial controls, and the impairment of assets. It highlighted some progress in areas like governance frameworks, independence monitoring, and audit documentation practices. However, significant shortcomings were found in how the firm verified related party transactions, particularly in identifying and addressing complex financial arrangements that could pose risks to transparency. Additionally, gaps were identified in compliance with sections 143(1)(e) and 185 of the Companies Act, 2013, which govern the proper use of company funds and transactions with directors. These findings underscore the need for enhanced quality control measures to address these critical deficiencies and improve overall audit practices.

Similarly, the report on Lodha & Co. LLP reviewed five audit engagements, highlighting challenges in audit documentation, independence declarations, and Engagement Quality Control Reviews (EQCR). NFRA recommended adopting advanced technologies for better documentation and streamlining quality control procedures across branches.

Both firms have committed to implementing the recommendations outlined in the reports, demonstrating their commitment to enhancing audit quality and ensuring compliance with regulatory standards. By addressing identified gaps and improving their practices, the firms aim to strengthen their governance frameworks, adopt advanced technologies for better audit processes, and ensure strict adherence to auditing and regulatory requirements. These inspections emphasize the vital role of robust governance systems, the use of technology for efficient and reliable auditing, and strict compliance with regulations in maintaining transparency and accountability within the audit profession.

Read the Story