In India's startup ecosystem, due diligence is a vital process that ensures compliance with tax laws, minimizes risks, and maximizes opportunities.
Due diligence in the context of direct and indirect taxes involves a comprehensive review of a company’s tax position and compliance with tax regulations. This process helps identify any tax risks or liabilities that may affect the company, particularly during mergers, acquisitions, or investment deals.
Income Tax
Return of Income: Review for timely filing of the Company's Return of Income, taking into account extended due dates for tax audit (Oct 31) and transfer pricing (Nov 30). If delayed, check the application of 1% monthly interest under Section 234A.
Outstanding Demands: Verify whether there are any outstanding tax demands, ensuring that the responses, payments inclusive of interest, have been made in order to avoid further demands/notices as per the Income Tax portal.
Deferred Tax: Verify deferred tax calculations in line with AS-22 or Ind AS 12, as applicable, checking for timing differences and permanent differences as well as appropriate accounting for the same.
Advance Tax: Check whether advance tax has been deposited on time: 15% by June 15, 45% by Sept 15, 75% by Dec 15, and 100% by March 15, and also calculate interest on delayed deposits, if any.
Tax u/s 56(2)(x) And 50CA: Review for implications with respect to tax under Sections 56(2)(x), in the event of transfer of shares at non-arm's length prices, checking whether the valuation reports have been obtained and in accordance with the Income Tax law.
Tax Audit And Transfer Pricing: Check whether the company is liable for tax audit or transfer pricing audit in line with the provisions of the Income Tax Act, 1961 and whether the same have been completed and filed within the due dates. Further, also verify whether all the necessary disclosures have been made as required by the applicable laws.
MAT Credit: Check whether MAT Credit is accounted for properly in the books at the time of payment of MAT Tax (18.5% of book profits), allowing set off only the regular tax liability which is over above the MAT tax liability.
Tax Deducted at Source (TDS)
Non-Deduction of TDS: Verify timely withholding and payment along with filing of taxes and assist in calculating TDS liability along with interest @ 1% or 1.5% per month, as applicable.
TDS Returns: Check whether TDS returns have been filed quarterly on or before the 31st of the following month for every quarter and before 31st May for the quarter ending in March 31. In case of non-filing of TDS returns on time, assist in computation of the resultant penalty of INR 200 per day.
TDS Payments: Check whether TDS was deducted and deposited in time (by the 7th of next month, or April 30th for the month of March), and whether a separate challan was used for section-wise TDS payments.
TDS At Lower Rates: Where TDS has been deducted at a lower rate than prescribed, check whether the same is supported by a lower deduction certificate. During the verification of the lower deduction certificate, check for the correctness of the TDS-reduced rate, thresholds, and validity period.
TDS Revisions: Compare the TDS returns with the books of accounts for accuracy, followed by revision of returns, if necessary, due to post-filing changes in the returns or differences identified on rectifications made in the books.
TDS Demands: Check the TRACES portal for any notices from the department and assist in identifying the correct amount payable towards resolving the demand.
TDS Receivable: Review FORM 26AS to identify the TDS receivables from customers and verify whether they are recorded properly in the books and credit received in a timely manner by supplier filing of their TDS return.
TDS On Exercise Of ESOPs: Verify that TDS on ESOPs is deducted at the time of exercise and ensure proper calculation of the taxable amount, i.e. perquisite, being the difference between the Fair Market Value and strike price.
206AB And PAN Non-compliance: Ensure that default is avoided by the company by deduction of TDS at higher rates where suppliers have not obtained a PAN or the same has become inoperative, and verify compliance with 206AB through the Reporting Portal to confirm higher TDS withholding for non-filers.
Equalisation Levy
Applicability @ 6%: Verify that the Equalisation Levy of 6% has been correctly charged on payments in excess of INR 1 Lakh for online advertising services availed from non-residents.
Payment Of Equalisation Levy (6%): Ensure that the 6% Equalisation Levy is deposited by the 7th of the succeeding month and assist in the calculation of interest (1% per month) or penalty (INR 1000/day) in case of late payment or non-payment.
Applicability @ 2%: Check whether the correct application of 2% Equalisation Levy is charged on payments made or to be made to non-resident e-commerce suppliers exceeding INR 1,00,000 in a financial year.
{The Finance Budget 2024 has proposed to abolish the 2% Equalisation Levy effective from August 01, 2024. This means consideration paid or payable for e-commerce suppliers or services on or after this date will not be subject to 2% Equalisation Levy.}
Payment Of Equalisation Levy (2%): Verify on-time depositing of the 2% Equalisation Levy by the 7th of the next month, or March 31st for Q4. The interest for late payment at the rate of 1 percent per month is computed and assisted in such a manner.
{The Finance Budget 2024 has proposed to abolish the 2% Equalisation Levy effective from August 01, 2024. This means consideration paid or payable for e-commerce suppliers or services on or after this date will not be subject to 2% Equalisation Levy.}
Equalisation Levy Return: Ensure that the Form I is filed on time, within June 30 of the next financial year, and assist in calculating the penalty of INR 100/day for filing the same with a deficit.
Goods and Services Tax (GST)
Accounting For GST Components: Ensure proper accounting of GST, separately maintaining Input Tax Credit and Output Tax Liability in the books and verify periodic set-off against the input credit as per GSTR-3B filings, maintaining CGST, SGST, and IGST bifurcation.
GST Compliances: Ensure accurate state-wise GST certificates, verifying taxable amounts, rates, invoices, HSN/SAC codes, and supplies. We assess annual return and audit requirements and ensure timely GST return filing, maintaining reconciliation with books of accounts.
Advance From Customers for Services: Verify whether GST has been paid for advances received from customers with respect to rendering of services. Further, as per the Central GST Notification No. 66/2017, tax payers are exempt from payment of GST on advances received for supply of goods.
Letter Of Undertaking: Where the company is involved in exports, check whether the Letter of Undertaking (LUT) in Form GST RFD-11 has been obtained for the exportation of goods / services without payment of GST.
Reverse Charge Mechanism: Check whether the provisions of Reverse Charge Mechanism (RCM) have been adhered to in case of lawyer fees, goods transportation services etc. and ensure timely payments have been made.
E-Way Bill And E-Invoice: Check for applicability of e-way bill and e-invoicing, review the process adopted by the company for linking with the portal as well as auto generation of E-way bill numbers, and do a sample e-invoice review to ensure correct implementation.
Refund Under GST: Where refund has been claimed during the review period, check whether timely filing of Form RFD-01 has been made and verify the workings as well as basis for the refund claim.
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