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LIVE NEWS LETTER


TOPIC : Aadhaar Authentication under GST Regime

CA Shivam Kakkar



TOPIC : E-Invoice under GST

CA Kusum Gandhi


Electronic invoice or E-invoice is future means of electronic billing. It has been adopted by many Governments internationally. The concept of E-invoicing was approved in 37th meeting of GST Council , which was held on 20th September, 2019 and according a notification was issued bearing no.68/2019 to 72/2019 CT on 13th December, 2019 which lays the legal road map for E-invoice .
The E-invoice under GST is introduction of Digital invoice for Goods & Services provided by business for which will be generated at Government GST Portal. The main aim of e-invoice generation is to check GST evasion. What is E-Invoicing?
E-Invoice is a system of generating invoices under which different sets of invoices generated by one software would be easily read by another software. It will also eliminate the need for any fresh data entry and errors. It is an exchangeable electronic document between a supplier and a buyer in an integrated electronic format.

Benefits of E-invoicing Benefits of E-invoicing for “Taxpayer”-
  • • One time reporting of B2B invoices for GST Returns & E-way bill
  • • E-invoice data to be used for E-way bill
  • • Standard Invoice readable by other softwares
  • • No punching & other errors

Benefits of E-invoicing for “Government”-
  • • Elimination of Fake Invoices
  • • System level Matching of ITC & Output Tax
  • • Complete Trail of B2B Invoices

Person liable to issue e-invoice Rule-48(4) of CGST Rules read with N. No. 70/2019-CT dated 13.12.2019 states that effective from 1.4.2020 an e-invoice shall be prepared by such class of registered persons whose aggregate turnover in a financial year exceeds 100 crores rupees in respect of supply of goods or services or both to a registered person.
The time limit has been extended to 01.10.2020 Vide N. No.13/2020- CT dated 21.03.2020. Further, registered persons referred to in Sub-rule (2), (3), (4) and (4A) of Rule 54 have been excluded from the requirement of issuing e-invoice.
Through N.N0.61/2020 CT dt. 30.07.2020 threshold limit has been extended from 100 crores to 500 crores.

Documents required to be reported to GST System
Following documents are covered under the concept of e-invoice and need to be uploaded to the IRP system -
  • • Invoice by Supplier
  • • Credit Note by Supplier
  • • Debit Note by Supplier
  • • Additional document as per the requirement of law to be reported by the creator of the document

Is the bulk-uploading of invoices possible with E-invoice system?
No, the invoices would be uploaded one at a time into the IRP. However, the ERP of a company may allow to upload bulk invoices at a time which are designed in such a way that it can place the request for the upload of individual invoices and fetch the QR code one by one in one go.
Common modes available to get e-Invoices registered
There are multiple modes available for getting e-Invoices registered on the Invoice Registration Portal (IRP). Some of the common modes are as follows -
  • • Web-based
  • • GSP based
  • • SMS based
  • • API based
  • • Offline tool based
  • • Mobile app-based

Cancellation of E-invoice
We can’t cancel an e-Invoice partially, it has to be cancelled fully only. Once an-invoice is cancelled, it needs to be reported within 24 hours into the IRN. Cancellation is not possible after 24 hours on the IRN and it needs to be cancelled manually on the GST portal before the taxpayers file the returns.
Print of E-invoice
Seller as well as the buyer may take print of e-invoice, using the QR code and even the signed e-invoice returned by the IRP.
Amendment in E-invoice
Any amendment in E-invoice can be done only on the GST Portal.
QR Code
A QR code (short for "quick response" code) is a type of barcode that contains a matrix of dots. It can be scanned using a QR scanner or a smartphone with built-in camera. Once scanned, software on the device converts the dots within the code into numbers or a string of characters.
For example, scanning a QR code with your phone might open a URL in your phone's web browser
QR code will consist the following e-invoice parameters-
  • • GSTIN of supplier
  • • GSTIN of Recipient
  • • Invoice no.as given by supplier
  • • Date of generation of invoice
  • • Invoice value
  • • Number of line items
  • • HSN code
  • • Unique Invoice Reference Number
Purpose of Signed QR Code
IRP will generate a QR code containing the unique IRN (hash) along with some important parameters of invoice and digital signature so that it can be verified by an Offline App.
How one can use the Signed QR Code?
Content of the signed QR code can be easily verified by the tax payers or Tax Officials to ascertain whether the invoice is registered with the IRP and is digitally signed by the IRP itself. By validating the content of the QR code data with the digitally signed content (which is part of the QR code itself) one can check the authenticity of the content. If the content of the QR code is tampered, the e-Invoice will become invalid and signature verification fails. The Signed QR Code can be verified by anyone using the offline app provided on the IRP portal.
Validity of E-invoice
E-invoice is valid only when it has Invoice Reference Number( IRN).
Disclaimer:
The contents of this article are solely for informational purpose. It does not constitute professional advice or a formal recommendation. No part of this article should be distributed or copied without express written permission of the author.


TOPIC : Critical Analysis & Taxability of Remuneration Paid to Directors under GST

CA Navya Malhotra



The advance ruling of Clay Craft (P) Ltd., has created a sense of panic in the thoughts of the assessee across the nation. The ruling stated that question sought is not about the taxability of service, but as to whether the services are liable to be taxed under GST in regard to RCM provisions being applicable to the company. Notification 13/ 2017-Central Tax (Rate) dated 28/06/2017 in serial no. 6 clearly states that the services supplied by the director of a company or the body corporate to the said company or Body corporate is liable to be taxed as RCM in the hands of the company or body corporate located in the taxable territory.
The brief facts stated and sought by Clay Craft (P) Ltd. Were as follows:
  1. The entity is paying GST under RCM in case of any commission paid to the directors in so far, the amount pertains to the services provided in the capacity as director.
  2. The salary paid to the directors are shown as “Income from Salary” in the hands of directors in their personal ITRs.
  3. The WTD directors of the entity are treated as an employee of the company and provided the same status of employees.
  4. The entity also deducts the EPF from their salaries and all the policies are stated as for the other employees.
  5. Employee not being defined under the GST Law.
  6. The MOA and AOA consisted of the clause for appointment of directors.
  7. Salary and other allowances to director are in the relationship of employer-employee and hence to be covered under entry no I of the Sch III of the CGST Act 2017.

The Authority has only taken note of the RCM, and outrightly denied treating directors as employees of the company. The AAR held that directors are not the employees of the company, consequently, GST would be applicable. It emphasised that the director is a supplier of services and the applicant (company) is the recipient of such services. Services rendered by the director to the company for which the consideration is paid to them, under any head, is chargeable to GST on reverse charge basis. Therefore, in respect of both the questions raised above, the applicant will liable to pay GST. A similar view was taken by the Karnataka AAR in the case of Alcon Consulting Engineers (India) (P.) Ltd. The authority has observed that services provided by the Directors to the company are not covered under Schedule-III as the director is not the employee of the company.
Legal Reference
1. DCA vide letter no. 2/19/63- PR dated 29.06.1964 which provided that a whole-time employee of a company also appointed as a director of the company is in the position of whole-time director
2. Provisions of the Companies Act:
  1. As per Section 2(34) of the Companies Act, 2013 ‘director’ means a director appointed to the Board of a company. Also, some directors are nominated by the Financial Institutions/Foreign Collaborators/banks/investors to form part of the board of directors. The Board has also powers to fill casual vacancies and appoint additional directors. All these directors collectively form a Board. The Board of Directors is the controlling authority of the company under the Companies Act, 2013.
  2. As per Section 149(6) of the Companies Act, 2013, an ‘independent director’ has been defined as a director not being a managing director or a whole-time director or a nominee director. The Independent directors do not work under the control and supervision of the company and therefore it can be inferred that independent directors are not the employees of the company.
  3. As per section 2 (10) "Board of Directors" or "Board", in relation to a company, means the collective body of the directors of the company
  4. As per section (54) "managing director" means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called. Explanation.—For the purposes of this clause, the power to do administrative acts of a routine nature when so authorised by the Board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within the substantial powers of management;
  5. As per Section 2(78) of the Companies Act, 2013, ‘remuneration’ means any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the Income-tax Act.
  6. Section 197 read with Schedule V of the Companies Act contains the provision for the computation and payment of director’s remuneration. Directors (other than whole-time directors and Managing Director) work only on a part-time basis. These directors are 'Non-Executive Directors'. Normally, they attend the meetings of Board or its committees. These directors get fees for attending the Board meetings or Committee meetings. But a managing director or a whole-time director, who is getting remuneration, is not entitled to sitting fee. Even if the sitting fee is paid, it will be treated as 'other allowance' and the overall salary will be subject to the limit of managerial remuneration specified in Schedule-V of the Companies Act, 2013.
3. Provisions of the Income-tax Act
To tax any amount under the head ‘Salary’ there must be an existence of employee and employer relationship. Notably under the Income-tax Act, 1961 there are no predefined rules or principle to decide whether directors are treated as an employee of the company or not. It provides that if a person is treated as an employee, his remuneration will be taxable under the head salary and tax would be deducted under Section 192. Therefore, before a payment can be taxed as salary, the relationship of employer and employee or master and servant must be established. Taxability of an income under the head ‘Salary’ pre-requisites existence of employee and employer relationship. Before a payment can be taxed as salary, the relationship of employer and employee or master and servant must be established. The judiciary has laid down various principles for determining the relationships of employer and employee. In the absence of the employer-employee relationship, the income shall be assessable either as business income or income from other sources. If a person has to work under the direct control and supervision of the principal and he has no discretion of his own in the performance of his duties, he is deemed to be an employee and the remuneration payable to him in such a case is chargeable to tax under the head salaries. On the other hand, if principal exercises only a supervisory control in respect of work entrusted to the person and he has wide discretion of his own in the execution of the policies of the principal, the presumption is that such person is not an employee. The remuneration payable to such person in such a case is liable to be taxed under the head ‘Profits and gains of business or profession’. The nature of a director’s employment may be determined by the Articles of Association of a company and the service agreement, if any, under which a contractual relationship between the director and the company has been brought about. To decide the question of whether a director is an employee of the company or not, one has to find out as to whether the relationship of master and servant exists between the company and the director. If Articles of the company confers a specific right to the company to remove any director before the expiration of his period of office by an extraordinary resolution and if he were so removed he would automatically be dismissed from the office of the managing director, the director could be considered as an employee of the company 4. Landmark Judicial Pronouncements
• Ramaben A. Thanawala vs Jyoti Ltd. And Ors. [AIR 1958 Bom 214, (1957) 59 BOMLR 67] decided by the Hon'ble Bombay High Court:
“…. it seems to us that the expression "whole-time director" must refer to a director who spends his whole time in the management of the company in the same sense as a managing director does”. The aforementioned definition and citation clearly bring out the element of employment in whole-time directorship.
• Maithan Alloys Ltd vs Bolpur on 22 April, 2019
“a whole-time director is considered and recognized as a 'key managerial personnel' under Section 2(51) of the Companies Act. Further, he is an officer in default [as defined in clause (60) of section 2] for any violation or non-compliance of the provisions of Companies Act. Thus, in our view, the whole time director is essentially an employee of the Company and accordingly, whatever remuneration is being paid in conformity with the provisions of the Companies Act, is pursuant to employer - employee relationship and the mere fact that the whole time director is compensated by way of variable pay will not in any manner alter or dilute the position of employer - employee status between the company assessee and the whole time director. We are thoroughly convinced that when the very provisions of the Companies Act makes whole time director (as also in capacity of key managerial personnel) responsible for any default / offences, it leads to the conclusion that those directors are employees of the assessee company.” “Further, in the present case, the appellant has duly deducted tax under section 192 of the Income Tax which is the applicable provisions for TDS on payments to employees. This factual and legal position also fortifies the submission made by the appellant that the whole-time directors who are entitled to variable pay in the form of commission are 'employees' and payments actually made to them are in the nature of salaries.”
• Ram Pershad vs Commissioner of Income-Tax, New ... on 24 August, 1972
“the relationship between him as the Managing Director and the Company may be similar to a person who is employed as a servant or an agent for the term 'employed' is facile enough to cover any of these relationships. The nature of his employment may be determined by the articles of association of a company and/or the agreement if any, under which a contractual relationship between the Director and the company has been brought about, whereunder the Director is constituted an employee of the company, if such be the, case, his remuneration will be assessable as salary under s. 7.” A similar view has been expressed by the Scottish Court of Session in Anderson v. James Sutherland (Peterhead) Limited (1) where Lord Normand at p.218 said: "........ the managing director has two functions and capacities. Qua managing director he is a party to a contract with the company, and this contract is a contract of employment; more specifically I am of opinion that it is a contract of service and not a contract for service."
• Indian Medical Association vs. V.P. Shantha [1956 AIR 550, 1995 SCC (6) 65]
In the case of a company and its working directors, the company maintains its ultimate control through the Board which has the authority to direct the mode and manner of performance of the working directors. This is also substantiated vide Section 2(53) of the Companies Act, 2013 which reads that: “manager means an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not;” In view of the above, the contract for appointment of the whole-time / executive director is a 'contract of service' amounting to employment.
• Employees State Insurance vs M/S. Apex Engineering Pvt. Ltd on 6 November, 1997
“in a case where the Managing Director is found to be the owner or occupier of the factory. Now it is obvious that Managing Director by himself cannot be said to be the owner of the factory which belongs to the private limited company, namely, the respondent herein and the working of the factory is controlled by the entire body of Board of Directors. But the Managing Director though being one of the directors cannot be said to be the sole owner of the factory, Nor can he said to be an occupier of the factory as the does not occupy the factory only by himself.”
• Sardar Harpreet Singh vs Commissioner of Income-Tax on 11 September, 1990
“As held by the Supreme Court in Gestetner Duplicators P. Ltd. v. CIT [1979] 117 ITR 1, salary is payment for the work done or service rendered, made by an employer to his employees; but every person who works for the company is not necessarily its servant. A person who manages the business of a company may be its servant or agent depending on the nature of his service and the terms of his employment. The nature of employment may be determined by the articles of association of the company or agreement, if any, between the company and the person concerned.”
• Rent Works India Pvt. Ltd. v. Commissioner of Central Excise, Mumbai-V [2016 (43) S.T.R. 634 (Tri.- Mumbai)], where it was held that

“7. … If an amount paid by the appellant to Shri Alan Van Niekerk is considered as salary by the Income Tax Department, a branch of Ministry of Finance, Department of Revenue, it cannot be held by the Service Tax Department, another branch of the Ministry of Finance, Department of Revenue, as amount paid for consultancy charges and taxable under the Finance Act. The same department of Government of India cannot take different stand on the amount paid to the very same person and treat it differently. In our considered view, the amount which is paid to Mr. Alan Van Niekerk, in the circumstances of this case as brought out herein above, has to be treated as salary to the director and the salary is not to be considered as to fall under the category of ‘Management Consultancy Services’ and liable for Service Tax. 8. In view of the foregoing and in the facts and circumstances of the case, we hold that the impugned order is unsustainable and liable to be set aside and we do so. …” [emphasis provided by us]
• Allied Blenders and Distillers Pvt. Ltd. v. C.C.E. & S.T., Aurangabad, reported in MANU/CM/0499/2018, after going through the Articles of Association, resolution passed by BOD for appointment of such directors, Form - 16 issued by the Company, Form - 32 filed by the Company with ROC, etc. held that the whole time directors were working in the capacity of employee and thus, salary paid to them is not taxable.
• Nrb Industrial Bearings Pvt. Ltd Versus CCE & ST
Similar view has been taken in this case as well. In this case, the person was appointed as a Managing Director and salary was paid to him as per MOA and AOA. Forms filed before ROC, has mentioned salary and perquisites payable/paid to the managing director. Since no evidence was produced by the department which provides that remuneration was not for routine work but for the consultation provided, therefore, service tax not leviable on salary paid to the managing director.
• Brahm Alloy Limited v. Commissioner of CGST & C. Ex., Durgapur, reported in 2019 (24) G.S.T.L. 616 (Tri. - Kolkata), has also held that whether the services provided by the director is in employer-employee capacity or as an independent service provider, depends on various facts, like, terms of appointment of such director, how the payment of remuneration is made to director, treatment of remuneration under Income Tax Act, etc.
• Concrete Pvt. Ltd. v. CCE, Siliguri, cited in 2018 (9) GSTL 391 (Tri. - Kolkata) and Maithan Alloys Ltd. v. CCE & ST, Bolpur, cited in MANU/CK/0094/2018 has also observed that consideration paid to whole time directors would be treated as payment of salaries in as much as there would be employer - employee relationship and in such cases, there cannot be any levy of Service tax.
• MCA circular
i. The Ministry of Corporate Affairs (MCA), while guiding the companies registered under the Companies Act on the issue of managerial remuneration, records with utmost clarity as follows (vide General Circular No. 24/2012 dated August 9, 2012):
“The Finance Act 2012 has introduced Service Tax which is applicable to anyone who provides a Service not covered under the negative/exempted list and if the value of the annual revenue is more than Rs. 10 lakh. The Non-Whole Time Directors of the Company are presently not covered under the exempted list and as such, the sitting fee/commission payable to them by the company is liable to Service Tax.” Without any need for further explanation, the aforementioned MCA Circular makes it amply clear that only in respect of payments made to non-whole-time directors (who are not director employees of the company working regularly for the company), service tax liability arises to the companies.  
ii. Circular No. 115/09/2009 – ST, Dated 31-07-2009
The CBIC clarified 9 that the amount paid by the companies to Managing Director/Directors (Whole-time or Independent) even if termed as commission, is not 'commission' within the scope of business auxiliary service and, hence, service tax would not be leviable on such amount. It further clarified that Managing Director/Directors (Whole-time or Independent) being part of the Board of Directors, perform management function and not a consultancy or advisory function. Thus, the payments made by Companies to Directors could not be termed as payments made for providing the management consultancy service.
5. Concluding remarks from the author
Taxability of director's remuneration under the GST should be determined on the basis of the fact whether the director is WTD or Non-WTD. The clarification is soon expected for the said anomaly and it can be concluded that the paid to the directors engaged in whole time employment with the company will be treated as part of the salary, and will be excluded from the ambit of GST.


REFUND UNDER INVERTED TAX STRUCTURE

CA Mrinal Garg



Section 54 of CGST Act 2017 provides various mechanism to the taxpayer under which they can claim REFUND of the INPUT TAX CREDIT(ITC) they had paid on the purchase of their supplies and otherwise also.
PROVISION
As per explanation 3 to section 54 the registered person may claim refund of any unutilised input tax credit at the end of any tax period: Provided that no refund of unutilised input tax credit shall be allowed in cases other than––
(I) zero rated supplies made without payment of tax;
(II) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council.

IMPORTANT CIRCULARS
Any registered person before applying refund must go through the following circulars which have been issued from time to time by Ministry of Finance.
• Circular No. 139/09/2020-GST dated 10.06.2020
• Circular No. 135/05/2020-GST dated 31.03.2020
• Circular No. 125/44/2019-GST dated 18.11.2019
• Circular No. 104/23/2019-GST dated 28.06.2019
• Circular No. 94/13/2019-GST dated 28.03.2019
• Circular No. 79/53/2018-GST dated 31.12.2018
• Circular No. 70/44/2018-GST dated 26.10.2018
• Circular No. 59/33/2018-GST dated 04.09.2018
• Circular No. 45/19/2018-GST dated 30.05.2018
• Circular No. 37/11/2018-GST dated 15.03.2018
• Circular No. 24/24/2017-GST dated 21.12.2017
• Circular No. 17/17/2017-GST dated 15.11.2017

TIME LIMIT
Any registered person claiming refund under this category has to file the same within two years from ‘Relevant Date’. Where Relevant Date means: • Prior to 01.02.2019: in the case of refund of unutilised input tax credit under clause(II) of first proviso to section 54(3), the end of financial year in which claim for refund arises. • W.E.F. 01.02.2019: in the case of refund of unutilised input tax credit under clause(II) of first proviso to section 54(3), the due date for furnishing return under section 39 for the period in which such claim for refund arises.
ANALYSIS OF AMENDMENT
Let’s take an example suppose any registered person wants to claim refund for JULY 2017 then prior to such amendment he can apply for refund u/s 54 till MARCH 2020 i.e. he was provided two years from the end of financial year to which refund relates BUT as per amendment a registered person was eligible to apply for refund till 20th MAY 2019. Since date for July 2017 was 20th May 2017. The impact of this amendment resulted in loss to taxpayers as time period to apply for refund for July 2017 lapsed on 20th May 2019 and they could apply the same.
DOCUMENTS REQUIRED TO BE FILED
Initially when refund were applied the taxpayer was required to submit the documents manually but now no such requirement exist as these documents are required to be attached at the time of filing RFD-01. Declaration/statement/undertaking/ certificates to be filled online Supporting documents to be additionally uploaded Declaration under second & third proviso to section 54(3) Copy of GSTR-2A downloaded from portal in PDF format of the relevant period. Declaration under section 54(3)(ii) Statement of invoices(Annexure-B) Undertaking in relation to section 16(20(c) and section 42(2) Self-certified copies of invoices entered in Annexure B whose details are not found in GSTR-2A of the relevant period. Statement 1 under rule 89(5) Statement 1A under rule 89(2)(h) Self-declaration under rule89(2)(1) if amount claimed does not exceed two lakh rupees, certification under rule 89(2)(m) otherwise
PROCEDURE FOR FILING THE APPLICATION
1. Login on taxpayer account on www.gst.gov.in. 2. Click on tab Refund>application for refund > select Refund on account of ITC accumulated due to Inverted Tax Structure option > select the relevant tax period for which refund is to be applied. 3. A dialogue box pops up asking Do you have refund for selected period? Clock on YES button. Your refund application opens up. 4. On the top of application a link appears click to fill the details of invoices for inward and outward supplies > upload Statement 1A and Validate it. If any error exists generate error report & correct the errors in statement 1A. Repeat the above process until your statement is validated without any error > click on proceed button. After clicking on proceed button you will get back to main page. 5. Now enter the various values in statement 1 for tax period for which refund is being claimed (Make sure you don’t enter any bogus value)
6. Now the amount calculated in in column no. 5 shall be entered in column no. 3 in amount eligible for refund under various heads i.e. IGST/CGST/SGST. Make sure that the amount entered under various head shall be lower of amount auto populated in column 1 & 2.
7. Now Select the bank account number in which refund amount is to be credited (Make sure that the selected Bank account is validated by PFMS.)
8. Now upload all the supporting documents as specified above & click on SAVE button.
9. The check box under head declaration & undertaking gets activated. Select the check boxes & click on SAVE button.
10. Click on PREVIEW button & view the drafted copy of application.
11. Click on SUBMIT button & finally click on PROCEED button.
12. Select the Authorised Signatory & file the application through EVC/DSC. After filing the application the ARN is generated which shall be used for tracing the status of the application.
HOW TO CALCULATE REFUND AMOUNT
Maximum Refund Amount = (Turnover of inverted rated supply of goods and services X Net input tax credit / Adjusted total turnover) – Tax payable on such inverted rated supply of goods and services Where, • “Net ITC” shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both. • “Turnover of inverted rated supply of goods” means the value of the inverted supply of goods made during the relevant period. • “Tax payable on such inverted rated supply of goods” means the tax payable on such inverted rated supply of goods under the same head, i.e. IGST, CGST, SGST. • “Adjusted Total turnover” means the turnover in a State or a Union territory, as defined under clause (112) of section 2 of CGST Act, excluding the value of exempt supplies other than inverted-rated supplies, during the relevant period. • “Relevant period” means the period for which the claim has been filed. EXAMPLE Details of Inward supplies PARTICULARS VALUE GST RATE GST(ITC) Inward supplies used for the manufacture of good which is taxed at 5% Rs.200000 12% Rs.24000 Inward supplies used for the manufacture of good which is taxed at 18% Rs.150000 18% Rs.27000 Total ITC Rs.51000 Details of Outward supplies PARTICULARS VALUE GST RATE GST(ITC) Turnover of inverted rated supply taxed at 5% Rs.300000 5% Rs.15000 Turnover of other supply taxed at 18% Rs.200000 18% Rs.36000 Total Turnover Rs.500000 Rs.51000 Maximum Refund Available = (300000*51000/500000)-15000 = Rs.156000 NOTE: If you are applying refund let say for FEB 2019 make sure that while arriving at figure of NET ITC only invoices on which ITC is taken in GSTR-3B are taken into account.

ITEMS ON WHICH REFUND IS PROHIBITED

Initially Notification No. 5/2017- Central Tax Dated 28-06-2017 was issued specifying list of prohibited items on which refund shall not be allowed.
However through Notification No. 20/2018 dated 26-07-2018 the refund shall be allowed in respect of strike items provided the in respect of strike items the accumulated ITC up to month of July 2018 shall lapse i.e. no refund shall be allowed for period up to July 2018

S.NO.      Tariff             item/heading/sub heading/chapter Description of Goods
1.             5007             Woven fabrics of silk or of silk waste
2.            5111 to 5113       Woven fabrics of wool or of animal hair
3.            5208 to 5212            Woven fabrics of cotton
4.            5309 to 5311            Woven fabrics of other vegetable textile fibres, paper yarn
5.            5407, 5408            Woven fabrics of manmade textile materials
6.            5512 to 5516            Woven fabrics of manmade staple fibres
7.            60             Knitted or crocheted fabrics [All goods]
8.            8601            Rail locomotives powered from an external source of electricity or by electric accumulators
9.            8602            Other rail locomotives; locomotive tenders; such as Diesel-electric locomotives, Steam locomotives and tenders thereof
10.            8603            Self-propelled railway or tramway coaches, vans and trucks, other than those of heading 8604
11.            8604            Railway or tramway maintenance or service vehicles, whether or not self-propelled (for example, workshops, cranes, ballast tampers, trackliners, testing coaches and track inspection vehicles)
12.             8605             Railway or tramway passenger coaches, not self-propelled; luggage vans, post office coaches and other special purpose railway or tramway coaches, not self-propelled (excluding those of heading 8604)
13.             8606             Railway or tramway goods vans and wagons, not self-propelled
14.            8607             Parts of railway or tramway locomotives or rolling-stock; such as Bogies, bissel-bogies, axles and wheels, and parts thereof
15.            8608            Railway or tramway track fixtures and fittings; mechanical (including electro-mechanical) signalling, safety or traffic control equipment for railways, tramways, roads, inland waterways, parking facilities, port installations or airfields; parts of the foregoing


FREQUENTLY ASKED QUESTIONS
QUES1: what is the time limit in which proper office is required to sanction the refund?
ANS1: As per section 56 of CGST ACT 2017, a proper officer is required to sanction the refund within 60 days from the date of filing.

QUES2: what if proper officer does not sanction refund within said period?
ANS2: As per section 50 of CGST ACT 2017, if proper officer fails to sanction the refund within 60 days, then the applicant shall be eligible for interest at 6%p.a.

QUES3: When can proper officer issue Deficiency Memo?
ANS3: Deficiency memo is issued through RFD-03. Whenever proper officer on receipt of application finds that the supporting documents attached by applicant are incomplete he may issue RFD-03.

QUES4: Can applicant make fresh application if RFD-03 after issuance of RFD-03.?
ANS4: Yes, applicant have to file fresh application for same refund period.
QUES5: Whether an applicant take input of those invoices which are not appearing in GSTR-2A while calculating amount of eligible ITC?

ANS5: Yes, an applicant is eligible to take ITC of such invoices which are not appearing in GSTR-2A provided he uploads scanned copy of such invoices as supporting documents. But there exist practical problem, that department does not consider the ITC of invoices which are not appearing in GSTR-2A.

QUES6: Is it compulsory to mention HSN for every invoice mentioned in annexure b?
ANS6: As per the revised circular issued by the cbic, the applicant is required to mention HSN only for those invoices for which it is mentioned in there invoice. Lets take an example, suppose applicant receives supplies from any registered person whose turnover is below 1.5 crores, then the invoice he must be having might not contain HSN because it not compulsory for him to mention. In such case applicant shall mention NA in front of invoice under head HSN.

QUES7: How to enter B2C detail in Statement 1A?
ANS7: This is most crucial point when you prepare statement 1A and frankly speaking you encounter problem because your sheet is not getting validated. While entering B2C details you must take total of all B2C invoices and enter it as single entry.

QUES8: Whether while preparing statement 1a can we paste all the entries directly after copying from excel sheet?
ANS8: It is not advisable to directly paste the data in columns because there may be chances that your file gets corrupted and when you upload json file it may show invalid data format error. In case you still want to use copy & paste then instead of simple paste option use paste special key. Moreover while preparing statement be cautious and rather uploading whole file you can validate in parts also.

QUES9: In case incomplete documents are uploaded by applicant what are the options available to proper officer other than issuance of RFD-03?
ANS9: The proper officer is not bound to issue RFD-03 only, he can issue issue show cause notice in RFD-08. The applicant is required to submit his response in RFD-09 within the prescribed period.

QUES10: What are consequences on issuance of RFD-08?
ANS10: If proper officer is satisfied with the response submitted by applicant in RFD-09 he will issue RFD-06(sanction refund) and if not satisfied by response then your refund will be rejected.

QUES11: Whether refund application once rejected can be filed again?
ANS11: If application is rejected by proper officer then applicant cannot make fresh application again for same refund period. However, if he is of view that department is unjustified in rejecting the refund he may file an appeal.




TOPIC : subject of admissibility of input tax credit

CA Vikas Kwatra




In the flashy world we live in, splurging on interior decoration and furnishing services has become the key to attract consumers specially in industries like the hotels, restaurants, gymnasiums, spas, etc. While the taxpayers feel that input tax credit of these service must be allowed in the light of their indispensability for their trade, the revenue has formed a generalized opinion that any input tax credit in relation to construction, repair, renovation or services are inadmissible in the light of the provisions of Section 17(5) of the CGST Act, 2017 ('CGST Act').

The Article below summarizes the subject of admissibility of input tax credit in respect of works contract and construction services in the light of the provisions of the CGST Act and the related judicial pronouncements.
I. Legal Provisions
At the outset, it is pertinent to have a look at the legal provisions under Section 17(5) of the CGST Act. The same are given below:
"(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (1) of section 18, input tax credit shall not be available in respect of the following, namely:-
(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery)on his own account including when such goods or services or both are used in the course or furtherance of business.
Explanation.-For the purposes of clauses (c) and (d), the expression "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property; ……"

Explanation.- For the purposes of this Chapter and Chapter VI, the expression "plant and machinery" means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-
i. land, building or any other civil structures;
ii. telecommunication towers; and
iii. pipelines laid outside the factory premises.
II. Pursuant to the aforesaid legal provisions the following conclusions can be drawn:
1. No ITC restricted for further supply of works contract services Clause (c) does not restrict input tax credit of works contract services when availed for further supply of works contract services. For example: Mr. A is providing works contract services in respect of residential premises of Mr. B which included plumbing works, electrical works, paint jobs and plastering of walls. Now, Mr. A subcontracts the plumbing works to Mr. C and Mr. C charges GST on his invoice. Now, ITC of works contract services in the nature of plumbing works shall be admissible to Mr. A as he is engaged in further supply of works contract services;
2. ITC restricted in case of construction undertaken on own account Clause (d) restricts input tax credit of goods and services used by a person for construction of an immovable property (except plant and machinery) on his own account. Thus, if a person purchases construction material and engages a labor contractor to provide the constructions services using the purchased material, ITC shall not be available of both the goods purchased and the services of the labor contractor procured;
3. ITC restricted in case of works contract services only to the extent expenses are capitalized
3.1. Clause (c) and clause (d) use the word 'construction' and as per the Explanation to clause (c) and clause (d) construction is only to the extent of capitalization. Consequently, ITC of any expenditure related to construction that is capitalized in the books of accounts shall be blocked. This shall not only cover the value of materials and works contract services but also expenditure directly related to the construction like inward supply of services from real estate agent, architect, interior decorators as these are involved in the establishment of the immovable property. However, for any repairs and renovations that are in the nature of revenue expenditure, ITC shall be eligible as the restriction is only in respect of goods and services used for construction to the extent of capitalization. It is pertinent to note here that General Accounting Policies must be followed strictly while capitalizing or charging the expenditure to revenue as the accounting treatment shall be a good alibi in deciding whether or not ITC is eligible.
3.2. At this juncture, it becomes necessary to discuss the judgment of Appellate Authority for Advance Ruling, West Bengal in the case of GGL Hotel and Resort Company Ltd. [2019] 105 taxmann.com 248. The appellant for the construction of Eco Resort on DBO (Design, Built and Operate) Model in ECO Park, New Town, Kolkata had taken certain land on lease from West Bengal Housing Infrastructure Development Corporation Limited (WBHIDCL) for 32 years on a lease premium of Rs. 17.20 crores with an annual lease rent at the rate of 10 per cent of the lease premium for the first two years, which will be escalated at the rate of 5 per cent per annum in the subsequent years from the start of the third year over the last annual lease rent per annum. took land on lease. The project was proposed to be completed within a period of 2 years and the lease rent paid during the pre-operative period had to be capitalized in the books of account by the appellant. The WBHIDCL was charging GST at the rate of 18 per cent on the lease rent. The appellant sought advance ruling on the following question:
'Whether credit is available on input tax paid on lease rent during pre-operative period for the leasehold land on which the resort is being constructed to be used for furtherance of business, when the same is capitalized and treated as capital expenditure.'

It was held that:
14.……"The lease rent paid during pre-operative period for the lease hold land, on which the construction activity had been taken for furtherance of business, has direct nexus between the lease rent and construction of resort. Had the appellant not paid the lease rent during pre-operative period it would not be able to take any construction activity thereon. Further the asset will be capitalized in the books of account of the appellant. So it is clear that the appellant is building the Eco Resort on its own account for furtherance of business and credit of tax paid on input goods/service is debarred in terms of section 17(5)(d). "
15. …… "It transpires from the above discussion that the Appellant is constructing the Eco Resort on his own account in course of furtherance of its business of providing hospitality service, for which one of the input service availed is lease rental service. The ambit of the blocked credit as per clause (d) of sub-section (5) of section 17 is broad as it includes such goods or services or both when used in the course of furtherance of business."
It can be inferred from the above that the Appellant Authority for Advance Ruling found a direct nexus in the lease rent paid during the pre-operative period and the construction activity undertaken to bring the building into existence. In this regard, the capitalization of this lease rent during the pre-operative period in accordance with the accounting policies was testimony of the nexus. Thus, ITC of lease rent paid during pre-operative period was held to be inadmissible under the provision of Section 17(5)(d) of the Act.
4. ITC eligible when works contract services used in respect of construction of plant and machinery
Clause (c) implies that there is no restriction of ITC with respect to works contract services used for construction of plant and machinery, the restriction being applicable only in the case of immovable property. Thus, it becomes pertinent to understand what shall constitute plant and machinery under the Act. The Explanation to Section 17(5) has been reiterated below:
"Explanation.- For the purposes of this Chapter and Chapter VI, the expression "plant and machinery" means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-
i. land, building or any other civil structures;
ii. telecommunication towers; and
iii. pipelines laid outside the factory premises"
A perusal of the aforesaid definition might make it difficult for the registered person to distinguish between plant and machinery and immovable property which is defined under Section 3(26) of the General Clauses Act as:
" immovable property" shall include land, benefits to arise out of the land, and things attached to the earth, or permanently fastened to anything attached to the earth
In this regard, the following points must be kept in mind while determining whether a works contract services are being procured for plant and machinery or immovable property:
• Accounting treatment shall serve to be an alibi whether an item is plant and machinery or immovable property. Whether a particular asset is treated as land and building in the books of accounts or taken to the fixed assets register under the head of plant and machinery or any other head shall be of relevance. Often it is seen that, in order to fasten turnkey responsibility of supply and installation of equipments and installations a single contract is awarded. Articles that do not form an integral part or create the identity of immovable property such as electronic equipments including audio- video equipment may be included in the same contract but as a separable item of supply with its own price and terms. In such circumstances, such audio video equipments might have to be separated under the applicable accounting policies from the construction material and labor for putting up the immovable property for the reason that these items DO NOT form an integral part or create the identity of the immovable property. This segregation might be for the reason that characteristics of use, usefulness and useful-life of that particular item/items is different from that of the immovable property. Hence, their distinct capitalization under the applicable accounting policies shall turn out to be an important factor in determining credit eligibility under the Act;
• In determining whether a particular asset is immovable property or land and building, reference may also be had to the purpose of fixation of that particular asset. If the attachment or fixation of the equipment is for the beneficial enjoyment of the land (or building) then the equipment becomes immovable property itself. But, if the attachment is for the beneficial enjoyment of the equipment then the equipment remains movable property. For example- if a structure is built as an enclosure for plant and machinery in the factory to protect it from the outside climate, although the same is immovable, it has been built for the efficient working of the plant and machinery and hence it should not be held as immovable property and ITC should be eligible.
III. While an opinion about credit eligibility may be formed on the basis of the preceding paragraphs, it becomes pertinent here to discuss a landmark judgment of the Hon'ble High Court of Orissa in the case of Safari Retreats (P.) Ltd. v. Chief Commissioner of Central Goods & Service Tax [2019] 105 taxmann.com 324 (Orissa), the Hon'ble High Court allowed ITC of construction material and services used for construction of mall in which shops were leased post construction instead of being sold. The Hon'ble High Court read down the provisions of the Section 17(5)(d) of the Act and held that the narrow interpretation of the revenue with respect to the provisions of Section 17(5)(d) was not acceptable. It was held that, in the present case, the Appellant had instead of selling the shops had leased out the same. Had the shops been sold before obtaining the completion certificate GST would have been paid and ITC would have been held to be admissible indisputably. Hence, it was held that the ITC of goods and services used for construction of mall were admissible and narrow interpretation of the provisions of Section 17(5)(d) was not acceptable.

The above judgment of the Hon'ble High Court should serve as a blessing for registered taxpayers who are generally obsessed at the receiving end of the department's narrow interpretation of the provisions of Section 17(5). Further, these are the views of the Hon'ble HC, in the absence of contradictory decisions of any other jurisdictional HC or SC, this decision should continue have force.


TOPIC : HEDGING OF FOREX EXCHANGE BY FORWARD CONTRACT

CA Jagdish Dhamija
(M) 98126-87796
(E) cajagdishdhamija@yahoo.com



INDEX:
1. Meaning of Hedging of Forex Exchange
2. Need of Hedging
3. How to Hedge through Forward Contract
4. Spot Rate
5. Cash Spot Rate
6. Bank Margin Rate
7. Premium on Hedging
8. Forward Contract Exposure
9. Early Utilization of Forward Contract
10. Cancellation of Forward Contract
11. Profit or Loss on Cancellation of Forward Contract
12. Forward Contract Limit
13. Outlay of Funds
14. Benefits of Forward Contract
15. Risk of Forward Contract
16. What to Do
17. What Not to Do
18. LEI (Legal Entity Identifier)
19. Examples

Lets start with an simple Example:
If Mr. Ashok have stock worth Rs. 10,00,000 on 01.01.2020 and willing to sell this to Mr. Sanjay between 01.02.2020 to 29.02.2020 and price between these dates get reduced to Rs. 9,90,000 then Mr. Ashok will book a loss of Rs. 10,000. Here, if someone gives you surety that he will purchase your stock between these days for Rs. 10,00,000 besides the actual markets price which may be less (say Rs. 9,90,000) or more (say Rs. 10,10,000) then its called hedging. So, by doing hedging you can ensure your fair price. Neither you will book loss nor you will get extraordinary profit.
Now read this example with different angle:
If Mr. Ashok expecting to get stock worth Rs. 10,00,000 between 01.02.2020 to 29.02.2020 and committed to sell such stock to Mr. Sanjay between 01.02.2020 to 29.02.2020 for Rs. 10,00,000. Due to any reason Mr. Ashok has not received its stock on time and price between these dates get increased to Rs. 10,10,000. Now Mr. Sanjay have to purchase it from other supplier for Rs. 10,10,000 and Mr. Sanjay has recovered this excess amount of Rs. 10,000 from Mr. Ashok as he was not able to provide the stock within due period.
Analysis of both examples:
First Example Second Example
1. In future price reduced 1. In future price increased
2. Mr. Ashok Booked Loss 2. Mr. Ashok Booked Loss
3. Goods were in Stock on due date 3. Goods were not in Stock on due date
4. Here was no Commitment of future sale4. Here was Commitment of future sale
5. Mr. Ashok may cancel the sale in reduced price without booking loss and stock can be hold by him 5. Mr. Ashok has not sold any goods and stock is with him (in transit) yet he booked the loss.
6. No Hedging, Hence booked Loss6. Hedging with inappropriate planning, Hence booked Loss
Conclusion:
1. Hedging in important for business to mitigate the future market risk.
2. Hedging is a DO DHARI TALWAR which must be done carefully.
Meaning of Hedging of Forex Exchange:
A foreign exchange hedge (also called a FOREX hedge) is a method used by companies to eliminate or "hedge" their foreign exchange risk resulting from transactions in foreign currencies.
A foreign exchange hedge transfers the foreign exchange risk from the trading or investing company to a business that carries the risk, such as a bank.
There is cost to the company for setting up a hedge. By setting up a hedge, the company also forgoes any profit if the movement in the exchange rate would be favorable to it.
Need of Hedging:
All exporters run their business to earn a pre-determined profit margin but as they receive sale consideration in Foreign Currency which is exchanged into India with INR at the prevailing rate of exchange transaction.
As we all know that rate of exchange varies in each second because of various factors, so this become very risky to predict the market on the date of receiving payment in foreign currency.
So, one has to hedge its upcoming payment at a specified rate to earn its pre-determined profit margin.
Lets Take a Example:
01.01.2020
Exporter willing to Sell 1000 units @ Rs. 75 Per Unit = Rs. 75,000
Credit Period offered : 60 Days
Exporter gets a order of 1000 units
1 USD = Rs. 75 (Spot Rate)
1 USD= Rs. 75.50 (Forward Contract Rate of 01.03.2020 to 05.03.2020)
Delivery Period: 60 Days
Payment Terms: On Actual Delivery
Foreign Currency Realization Period: Appx. 01.03.2020 to 05.03.2020 (Importer will start payment process after actual delivery on 01.03.2020 which may take few days)
So, here an exporter will final its order for USD 1,000 (Rs. 75000 / 75) which will be received by him on 01.03.2020
Now, let us assume price of USD on 01.03.2020:
1 USD = Rs. 76 (Here Exporter will receive 76000 in Exchange)
1 USD = Rs. 74 (Here Exporter will receive 74000 in Exchange)
1 USD = Rs. 75.50 (Fixed Rate against Forward Contract)
From the business point of view, last option is best where the exchange rate is fixed and exporter will get a fixed rate of Rs. 75.50 per USD i.e. Rs. 75500.

How to Hedge through Forward Contract:
Forward contracts are booked through Authorised Dealer i.e. Bank where exporter gets its payment in Foreign Currency. Although, he may also book forward contract in other bank but generally it is opened in the same bank.
Followings are the steps to book forward contract :
1. Set your forward contract limit with bank
2. Contact the branch / Treasury to get the spot rate for the desired amount
3. Get premium for your desired period (Expected payment receiving period)
4. After finalizing spot rate reduce the margin rate / cash spot rate from it and add premium in it.
5. Sign the contract of the booked forward contract with bank.
Now, the forward contract has been booked which will be utilized later on.

Example:
USD to be Hedged = 100,000
Spot Rate on 01.01.2020 = Rs. 75.00
Premium for 01.03.2020 = Re. 0.50
Bank Margin = Re. 0.05
So, forward contract booking rate will be finalized @ Rs. 75.45
Here, it is to be noted that forward contract can be booked for maximum 30 days which means a forward contract booked for 01.03.2020 can be utilised upto 30.03.2020.

Spot Rate:
A spot exchange rate is the current price level in the market to directly exchange one currency for another, for delivery on the earliest possible value date. Cash delivery for spot currency transactions is usually the standard settlement date of two business days after the transaction date (T+2).

Cash Spot Rate:
If someone needs to exchange the currency on the same day then first he will book spot rate and after that bank will reduce some margin from it on account of early payment than the standard settlement date i.e. T+2 This reduced margin is called cash spot margin.

Bank Margin Rate:
Bank provides necessary services to hedge the foreign currency exposure by booking forward contract. In lieu of this service bank charge margin which is reduced from the spot rate booked.

Premium on Hedging:
When we deposit some funds in the bank then we receive interest on it, which means Rs. 100 deposited on 01.01.2020 in the bank will have additional value on 01.03.2020 i.e. interest. Same like above, exchange rate is also supposed to increase in upcoming period. This increment in the exchange rate is called premium which is given by bank. Premium is generally based on the period of booking. Premium on 01.01.2020 for the period of 01.03.2020 will be more than the period of 01.02.2020.

Forward Contract Exposure:
To understand the Forward Contract Exposure, lets understand the following example:
Today is 01.01.2020
Payment Expected on 01.03.2020 to 05.03.2020
Payment USD 100,000
Spot Rate = Rs. 75
Premium from 01.01.2020 to 01.03.2020 = Re. 0.50
Bank Margin = Re. 0.05
Final Forward Booking Price = Rs. 75.45
Now, suppose due to any reason exporter has not received its payment which is not likely to be receive in April 2020. So, exporter is unable to deliver USD 100,000 to bank in the due period and here bank have to acquire this amount of USD 100,000 from the open market. If as on 05.03.2020 the spot rate is Rs. 76 then bank need to pay extra Rs. 76 x USD 100,000 = Rs. 76,00,000 in the open market whereas as per forward contract bank have to pay Rs. 75,45,000 to exporter to acquire USD 100,000.
So, now bank has paid excess amount of Rs. 55,000. Although, this amount is recoverable from Exporter but till then it will be treated as Exposure to Exporter (Non Fund Based Limit) and bank need to secure this amount through margin in the form of FDR or Collateral Security.
Here bank was on the risk of 55000/7545000 = 0.73% of total forward booked. Generally, banks considered this risk from 2% to 5%.

Early Utilization of Forward Contract:
Many times buyer makes payment before the due date. In this case forward contract booked for the due period can be utilized early. Lets understand its impact through an example:
Today is 01.01.2020
Payment Expected on 01.03.2020 to 05.03.2020
Payment USD 100,000
Spot Rate = Rs. 75
Premium from 01.01.2020 to 01.03.2020 = Re. 0.50
Bank Margin = Re. 0.05
Final Forward Booking Price = Rs. 75.45
Actual Payment Received on 19.02.2020
Now consider following figures also on 19.02.2020:
Spot Rate = Rs. 76
Premium from 19.02.2020 to 01.03.2020 = Re. 0.10
Bank Margin = Re. 0.05
Here, Bank will make payment to exporter by utilizing booked forward contract i.e. Rs. 75.45 and will sell early received in open market @ Rs. 76 and will book another forward contract for the period 01.03.2020 at its end only. Here no involvement of exporter is needed.
Although, Bank will recover from Exporter Premium and Bank Margin i.e. Re. 0.15, which is called SWAP Charges.

Cancellation of Forward Contract:
Due to any reason, if exporter is not able to receive payment within due periond then he can also cancel the contract. Lets understand its impact through an example:
Today is 01.01.2020
Payment Expected on 01.03.2020 to 05.03.2020
Payment USD 100,000
Spot Rate = Rs. 75
Premium from 01.01.2020 to 01.03.2020 = Re. 0.50
Bank Margin = Re. 0.05
Final Forward Booking Price = Rs. 75.45
Now consider following figures also on 01.03.2020 (Cancellation Day):
Spot Rate = Rs. 76
Bank Margin = Re. 0.05
Here, Bank will make cancel the contract and will recover from Exporter Difference of Spot Rate on cancellation day (Rs. 76) and Forward Contract Rate (Rs. 75.45) and Bank Margin i.e. Re. 0.60, which is called SWAP Charges.

Profit or Loss on Cancellation of Forward Contract:
In case of Cancellation of Forward Contract either there will be profit or loss. Bank will always recover loss from the exporter but profit will be passed on some conditions only.
1. Cancellation has been done within the due period
2. Forward Contract was not booked for speculation purpose
We already have discussed about loss. Now we will understand the example of profit.
Today is 01.01.2020
Payment Expected on 01.03.2020 to 05.03.2020
Payment USD 100,000
Spot Rate = Rs. 75
Premium from 01.01.2020 to 01.03.2020 = Re. 0.50
Bank Margin = Re. 0.05
Final Forward Booking Price = Rs. 75.45
Now consider following figures also on 01.03.2020 (Cancellation Day):
Spot Rate = Rs. 75
Bank Margin = Re. 0.05
Here, Bank will make cancel the contract and will pass Exporter Difference of Forward Contract Rate (Rs. 75.45) and Spot Rate on cancellation day (Rs. 75) but will recover Bank Margin i.e. Re. 0.40, which is called SWAP Charges.

Forward Contract Limit:
As we have seen in last slide that without investing a single rupee, profit can be earned by cancellation of forward contract at the lower price. This practice will defeat the motto of hedging and will encourage the speculation.
So, to discourage this type of practice, RBI has imposed forward contract limit which is Higher of:
1. Average of last 3 years Export Annual Turnover
2. Export Turnover of last year

Outlay of Funds :
Today is 01.01.2020
Payment Expected on 01.03.2020 to 05.03.2020
Payment USD 100,000
Spot Rate = Rs. 75
Premium from 01.01.2020 to 01.03.2020 = Re. 0.50
Bank Margin = Re. 0.05
Final Forward Booking Price = Rs. 75.45
Actual Payment Received on 19.02.2020
Now consider following figures also on 19.02.2020:
Spot Rate = Rs. 75
Premium from 19.02.2020 to 01.03.2020 = Re. 0.10
Bank Margin = Re. 0.05
Here, Bank will make payment to exporter by utilizing booked forward contract i.e. Rs. 75.45 and will sell early received in open market @ Rs. 75.
Bank has paid Rs. 75,45,000 to the exporter on 19.02.2020 and sold the same USD in open market for Rs. 75,00,000. So, bank has paid extra Rs. 45,000 out of its pocket for the period 19.02.2020 to 01.03.2020 i.e. 11 days. This is called outlay of funds and bank will charge Interest on outlay of funds.
This will be charged alongwith SWAP charges.

Benefits of Forward Contract:
1. Mitigation of Financial Risk due to Fluctuation in Foreign Currency
2. Minimum Costing of Booking and Cancellation
3. Easy Process of Booking and Cancellation

Risk of Forward Contract:
1. It will increase the Financial Exposure of the Exporter (NFB)
2. Processing Charges on NFB Financial Exposure
3. Loss can be booked if not booked with proper planning

What To Do:
1. Analyze the Financial Risk of Foreign Exposure
2. Calculate the very much exact date of receiving of payment
3. Book the Forward Contract on the date of Finalization of Sale Order
4. Keep the records of all forward contract date wise
5. If cancellation required then cancel the forward contract within due dates
6. It is advised to hire a professional to monitor all these transactions

What Not To Do:
1. Do not Book Forward Contract without Sale Order
2. In case multiple Forward Contract Booked, then utilize it on FIFO basis.
3. Do not attempt to earn speculative profit.

LEI (Legal Entity Identifier) :
Likewise PAN every person who wants to book forward contract need to apply for LEI.
For this, you can visit https://www.ccilindia-lei.co.in/
Examples:
Forward Contact Already Booked
Booking Date Amount Period Rate
01.01.20USD 100,000 01.02.20 to 01.03.2076.00
14.01.20 USD 100,000 19.02.20 to 18.03.20 74.00


USD 100,000 received on 10.02.2020 and another USD 100,000 will be received on 25.02.2020 surely.
Spot Rate on 10.02.2020 as well as on 25.02.2020 is Rs. 73.
Now, what should be sequence of utilization of forward contract ?
Lets utilize 1st contract for 1st Payment and 2nd Contract for 2nd Payment
Swap Charges = Nil (As the Forward Contract utilized within due date)
Outlay of Funds = Nil (As the Forward Contract utilized within due date)
Now, Lets utilize 2nd contract for 1st Payment and 1st Contract for 2nd Payment
Swap Charges = Rs. 12,000 (Early Forward Contract utilized 9 days. Appx. Premium will to be reversed 7 Paisa + 5 Paisa Bank Margin)
Interest on Outlay of Funds = Rs. 246 (Interest of Rs. 900000 for 1 day @ 10% p.a.)
Total Loss on misutilization will be Rs. 12246.
Examples:
Forward Contact Already Booked
Booking Date Amount Period Rate
01.01.20USD 100,000 01.02.20 to 01.03.2076.00
14.01.20 USD 100,000 19.02.20 to 18.03.20 74.00


USD 100,000 received on 25.01.2020 and another USD 100,000 will be received on 01.02.2020 surely.
Spot Rate on 25.01.2020 as well as on 01.02.2020 is Rs. 73.
Now, what should be sequence of utilization of forward contract ?
Lets utilize 1st contract for 1st Payment and 2nd Contract for 2nd Payment
Swap Charges = Rs. 29,000 (Premium will be reversed of 6 days + 18 days. Appx. 19 Paisa and Bank Margin 10 Paisa)
Interest on Outlay of Funds = Rs. 986 (Interest of Rs. 360000 for 1 day @ 10% p.a.)
Now, Lets utilize 2nd contract for 1st Payment and 1st Contract for 2nd Payment
Swap Charges = Rs. 24,000 (Premium will be reversed of 24 days. Appx. 19 Paisa and Bank Margin 4 Paisa)
Interest on Outlay of Funds = Rs. 658 (Interest of Rs. 240000 for 1 day @ 10% p.a.)
Best option is utilize 2nd contract for 1st Payment and 1st Contract for 2nd Payment.

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