CA. Rohan Bhandare explains the important financial and tax changes to look out for in the New Year
Although the start of the new year is the best time for resolutions and goal settings, businesses usually save their planning for the start of the financial year.
One business resolution which is sometimes carried forward year on year is to finalise the books of accounts much before the timelines. To help achieve this resolution, let us break down this large resolution into mini resolutions and stay ahead of the curve. Here are certain important finance and tax changes to look out for in the year 2022 along with the resolutions:
- Changes in Goods and Services Tax w.e.f. 1st January 2022
Revision in GST Rates: Just like many of us were working on our Income Tax Return filings on 31st December, the GST Council was also in business on the last day of the year, deferring the much debated GST rate hike of textiles. However, the hike in GST rates for the footwear sector, e-commerce sector and government sector have taken place as notified w.e.f. 1st January 2022.
GSTR-1 filing allowed only after filing preceding month GSTR-3B: Upto 31st December 2021, taxpayers (suppliers) were not able to file GSTR-1 if they had pending GSTR-3B filings for the past two months. From 1st January 2022, taxpayers cannot file the GSTR-1 if the preceding month’s GSTR-3B is not filed. Example: If the supplier does not file GSTR-1 for the month of January 2022, he shall not be allowed to file GSTR-3B for the month of February 2022.
Self-Assessed Tax: A new explanation to Section 75(12) has been inserted to the effect that the output tax relating to any invoices which are reported in GSTR-1 but not included in GSTR-3B shall be considered to be self-assessed tax for the purposes of section 75. The aforesaid amendment shall allow the Department to directly initiate recovery in respect of the said self-assessed tax.
Input Tax Credit: The taxpayer had been allowed to claim input tax credit (ITC) based on the four conditions mentioned in Section 16 of the CGST Act. However, a fifth condition by way of clause (aa) to Section 16(2) had been inserted by the government, wherein the eligibility of the ITC shall be contingent upon the vendors furnishing the invoice/debit note details in their GSTR-1 and such details are communicated to the recipient. From 01.01.2022, the current 5% provisional ITC benefit has also been withdrawn, and the ITC in respect of invoice/debit note can be claimed only if the details of the same are reflected in GSTR-2B.
Resolution: Gone are the days where accounting was like the police in old Bollywood films- always arriving much later than the actual transaction. GST has ensured that the sales and purchases/expenditures are not only booked correctly but timely as well. Changes in GST rates do not only take place in yearly Union Budgets, but need to be tracked regularly. With no concept of revising returns in GST, any mismatch not only affects your finances but affects your relationship with your valued customers, as well. With the GST training wheels coming off, businesses will have to invest in adequate accounting resources and review the GST compliance levels of their suppliers.
- Income Tax Compliances
The newly launched Annual Information Statement (AIS) / Taxpayer Information Summary (TIS) have already given us a glimpse of the data mining prowess of the Income Tax Department. The extensive Annual Information Statement captures information beyond the TDS, TCS and tax payment and includes additional details relating to savings bank interest income, dividend, securities transactions, mutual fund transactions, foreign remittances. The new Income Tax portal will also release additional features to make tax filing simpler and easier. The Faceless Assessments and the recently notified Faceless Appeals Scheme could be at full throttle in the Year 2022.
Resolution: With interactions with Income Tax offices increasingly becoming faceless, businesses would need to maintain robust documentation and hone their drafting skills for clearer representations. Since assessments are becoming speedier and time bound, businesses would also need to invest in technology to avoid spending unnecessary energies on the reconciliations of amounts disclosed under direct and indirect tax laws.
- Audit Trail for Companies
For the financial years commencing on or after 1st April 2022, it is mandatory for companies (irrespective of the amount of paid-up capital or turnover) to use accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility. This amendment is a substantial change in the manner of accounting transactions, and will ensure transparency and stronger internal control systems.
Resolution: Companies would need to consult their software vendors to add this feature to their accounting software. Further, companies would also need to ensure that the audit trail feature cannot be disabled during the year.
- New Schedule III Format for Companies
The Ministry of Corporate Affairs has amended the Schedule III of the Companies Act, 2013, which particularly pertains to the Companies’ financial statements ending March 2022 (irrespective of the amount of paid up capital or turnover).
Reports which earlier only formed part of your MIS and review meetings may now form part of your signed financial statements. Companies now have to disclose the Ageing Schedules of Trade Receivables, Trade Payables, and Capital Work in Progress in their Financial Statements.
There are 11 types of ratios which would form part of the Financial Statements, including net profit ratio, return on equity ratio, trade receivables turnover ratio, and inventory turnover ratio.
Where the Company has borrowings from banks or financial institutions on the basis of security of current assets, it shall disclose whether the quarterly returns or statements of current assets filed by the Company with such banks or financial institutions are in agreement with the books of accounts.
Even details of crypto currency or virtual currency have to be separately disclosed in the financial statements.
Resolution: Companies could start working on the disclosures and ratios with the amounts finalised for F.Y. 2020-21 right away, since companies would need to disclose previous year ratios as well as give an explanation in case the ratio has changed by more than 25% as compared to the previous year.
The ageing reports and borrowing disclosure would also help banks in their compliance checks and could save time on anyreconciliation.
- Business Responsibility and Sustainability Report (BRSR)
Although this report is mandatory only for the top 1,000 listed companies by market capitalisation from FY 2022-23, it is a sign of the prominence of environmental, social, and governance (ESG) parameters in the times to come. The new report will compel organisations to holistically engage with stakeholders and go beyond regulatory compliance in terms of business measures and reporting.
Resolution: The ESG parameters could prove to be major factors at the time of fund raising, credit rating, and mergers / acquisitions in the years to come. It could be a roadmap for smaller businesses and startups to be more agile and adapt themselves to the ever changing world.
The Way Forward
Listed entities generally signed off their financial statements ending 31st March by the succeeding months of April and May, while other businesses traditionally took a longer time to finalise their books of accounts.
However, the game changing direct and indirect tax provisions have compelled other businesses to keep up to date.
If businesses embrace digitalisation and put adequate internal control systems in place at the start of the year 2022 and leverage the emergence of stricter GST norms, a comprehensive annual information statement and revised disclosures for companies under Schedule III, they would not only tick off this long pending resolution, but could turn this resolution into a habit.