NEWSLETTER - MARCH 2019 -...

Circulated By Email

Volume - II | March 2019

Baroda Branch of Western India Regional Council of

The Institute of Chartered Accountants of India

The Institute of

Chartered Accountants of India(Setup by an Act of Parliament)

Newsletter

Editorial Team

CA. Hitesh Agrawal

CA. Krunal Brahmbhatt

CA. Vin d Pahilwani

CA. Manoj Sahu

CA. Vishal Doshi

CA. Dhiren Parikh

CA. Rikin Patel

CA. Rahul Agrawal

CA. Dhruvik Parikh

99980 28737Chairman

78748 11551Vice-Chairman

98980 78176Secretary

90990 94500Treasurer

98240 59901Ex-officio

93762 11099IP - Chairman

88667 09509Committee Member



o

CA. Hitesh Agrawal CA. Rahul Agrawal

CA. Nayan Kothari CA. Manas Rindani

CA. Niraj N Shah CA. Ketki Desai

CA. Keyur Shah CA. Dhruti Vaidhya

CA. Daxesh Gandhi CA. Niraj Majmundar

Forthcoming Events

Direct Tax Updates

Photo Gallery 11

Pg 02

Pg 03

SA 700 (Revised) & SA 701(New)

Z Score - A measure to evaluatecorporate bankruptcy Pg 08

Pg

Judicial Decisions on Pg 04Indirect Taxes

Pg 05

GST Update Pg 07

Managing Committee

Contents

“Where women are honoured, divinity blossoms there;and where they are dishonoured,

All actions remain unfruitful”

Penning this communication down in the month of March wherethe whole world would be celebrating International Women’sDay on March 8. It makes my heart feel proud of rich heritage and culture ofAncient India, where women have been placed at such high pedestal. Aboveshloka makes me to relate this context to our virtuous Indian women incontemporary context. If women in Ancient India were places on such a loftypedestal, they should get the same platform they deserve in modern India too;after all they are exclusively blessed with the power to create, nurture andtransform this universe.

Time flies and takes us along. In the blink of an eye, we have already reached thismonth of March where we shall also witness the festival of colours. This Holi let usunite and paint the heart with colours of happiness. This festival signifies thevictory of good over evil, let us all promise to join hands and fight the evil together.

I also take this opportunity to give my heartiest congratulations to the new brandambassadors of ICAI- CA. Prafulla P. Chhajed sworn in as the President and CA. AtulKumar Gupta as the Vice- President.

February will always remain a standout month of the year as major league eventsof national significance took place during this month. Interim Budget 2019 wasannounced which opened many new opportunities for the personnel of ourprofession. This month, India also witnessed a terrifying event of terrorism. Iwould like to express my heartfelt condolences to the brave Martyrs.

March; being the concluding month of the financial year, our professionalcolleagues will be engrossed in the finalization of books of accounts of theirclients and giving their expert advice to them. Along with such busy schedule, wehave planned several events for our members and students during this month.The details of which are given in the newsletter.

I would like to inform you all that we, at the Baroda Branch of ICAI strongly believein grievances redressal and I would like to assure all the members and studentsthat you have our all ears even for the minutest grievance that you are facing. Andwe shall strive to give our best solution for them all.

Concluding with my warm wishes to all-

Happy International Women’s Day and Happy Holi!

Regards,

CA. Hitesh AgrawalChairman

Chairman Communication

NewsletterBaroda Branch of WIRC of ICAI

2 MARCH 2019Volume - II

Branch Events

Study Circle Meeting on Banning ofUnregulated Deposit Scheme Ordinancejointly with Baroda Branch of WIRC of ICAI

Study Circle Meeting onCompanies Act Provisions relevant for Auditof Financial Statements

Mock Test Series-1 (Final)

Lecture Meeting - Recent Changes inCompanies Act, 2013 and Audit Reporting

Lecture Meeting on Filing of Form INC 22,DPT 3, MSME 1 under Companies Act,2013

2 days Conference onStatutory Bank Branch Audit

Hrs

Hrs

Hrs

Hrs

Hrs

CPE CPE

CPE

CPE

CPE

2 2

2

2

12

Day & Date : Thursday, 07.03.2019

Time : 06:00 pm to 08:00 pm

Faculty : CA. Vishal Doshi, Vadodara

Fees : Rs. 250/- for Non Study Circle Members

Venue : ICAI Bhawan, Vadodara

Day & Date : Tuesday, 26.03.2019

Time : 06:00 pm to 08:00 pm

Faculty : CA. Pareen Shah, Vadodara

Fees : Rs. 250/- for Non Study Circle Members


Day & Date : Saturday, 09.03.2019

Time : 06:00 pm to 08:00 pm

Faculty : CA. Himanshu Kishnadwala, Mumbai

Fees : Rs. 350/-


Day & Date : Monday, 18.03.2019

Time : 06:00 pm to 08:00 pm

Faculty : CA. Vikash Jain, RCM, Ahmedabad

Fees : Rs. 350/- including 18% GST


Day & Date : Friday & Saturday, 22 & 23.03.2019Time : 09:00 am to 05:00 pmFaculty : Circular to follow ( Image)Fees : Rs.1200/- including GST till 20th

March afterwards Rs. 1500/- including GSTRs. 700/- including GST till 20th

March afterwards Rs. 1000/- including GSTRs.1500/- including GST till

20th March afterwards Rs. 1800/- including GSTVenue : ICAI Bhawan, Vadodara

For Members:

For Students:

For Non Members:

International Women’s Day Celebration

A¡L d¡L _p„ d_ ky^u, ÷u-`yfyj AgN R sp„ gNp¡gNDay & Date : Friday, 08.03.2019

Time : 04:00 pm to 07:00 pm

Faculty : Mr. Krishnkant Unadkat & Ms. Jyotiji Unadkat

Fees : Rs.100/- ( Open for All)


Box Cricket League for 40+ aged CA Members

Holi Celebration


Fees : Rs.2500/- Per Team

Venue : Huddle Sports Arena , Nr. Akshar Chowk, Baroda

Day & Date : Thursday, 21.03.2019Time : 09:00 am to 12:00 NoonVenue : ICAI Bhawan, Vadodara

WICASA Events

Education Tour about General Awarenessone Should Know


Time : 10:30 am to 01:30 pm

Fees : Rs. 50/- only

Venue : Tandalja Police Station, Cyber Cell

Mock Test Series-1 (IPC\INTER)

R e c o g n i t i o n

CA. Manish Baxi

Member ofInternational Corporate Tax task Force

for 2019 by

MARCH 2019Volume - II


3

Contributed by : CA. Narendra Hindochacan be reached at [email protected]

Direct Tax Updates

1. Finance Bill 2019

The Finance Minister, while presenting the InterimBudget and introducing the Finance Bill 2019proposed some changes in Income-tax law largelyfor the benefit of small and middle class taxpayers,stating that the

in pursuance of theimpending elections.

These are briefly as under:

i) Provision for rebate under section 87A to bechanged, so that

According to my understanding, this has the

- If income exceeds this amount, there is nochange in tax liability.

- There is no provision for marginal relief andhence if income exceeds this amount byonly Rs.10/-, tax liability will be much higherthan excess of income over Rs.500000/-.

- Return will be required to be filed even if notax is payable, if the income exceedsRs.250000/- or in case of Senior Citizenaged less than 80 years, Rs.300000/-

- Declaration by Senior Citizens in Form 15Hcan be filed for income upto Rs.500000/-but Form 15G cannot be filed if relativeincome exceeds Rs.250000/-

ii) for salaried persons to behigher at in place of Rs.40000/-

iii)in place of one earlier. There is

no change in amount of interest deductibleunder section 24 for such properties which willnow be Rs.200000/- for both the propertiescombined.

iv) (in place ofRs.10000/- earlier) from interest

Also no TDS on rent uptoRs.240000 (compared to Rs.180000 earlier)

v) Exemption under section(in place of one

earlier) for capital gains upto Rs.2/- crores

remaining proposals can wait untilthe formation of Government

no tax payable by individual ifhis income is upto Rs.500000/-.

following implications:

Standard deductionRs. 50000/-

No tax on notional rent in respect of two selfoccupied houses

No TDS upto Rs.40000/-from

bank/post office.

54 to be available forinvestment in two houses

which can be availed only once in a lifetime.

vi)(in place of 31-03-2019 earlier) to be eligiblefor deduction under

vii) from tax onfrom end of

the year of completion of housing project(Compared to one year earlier)

The world would be much happier place if we couldaccept our mistakes. The took thelead by observing as under:

“We find substance in this submission of theassessees. We have

This was in Appeal No(S). 1784 Of 2019 in case ofPr. Commissioner Of Income Tax Versus M/S.Aarham Softronics and others

The issue before the Court was:

"Whether an assessee who sets up a new industryof a kind mentioned in sub-section (2) of Section80-IC of the Act and starts availing exemption of100 per cent tax under sub-section (3) of Section80-IC (which is admissible for five years) can

on the ground thatthe assessee has now carried out substantialexpansion in its manufacturing unit?”

The Supreme court had earlier decided the issueagainst the assesseee and held that after first 5years, the deduction for remaining 5 years wouldbe only at the lower rate and not 100% in case ofassessee who had setup a new unit and thereaftercarried out substantial expansion in the same unit.

This decision reverses its earlier decision anddecides the matter in

In consequence of order of the Supreme Courtupholding constitutional validity of Aadhaar,CBDT issued Press Release, dated 14-2-2019stating that in terms of Section 139aa Of TheIncome-Tax Act, 1961 Aadhaar and PA No.

Some time back it was common to seekadjournment on the

Today you can go out of country andreturn in a day. Hence being out of station canhardly be a good ground for seeking adjournment.

Housing projects approved upto 31-03-2020

section 80IBA

Exemption notional rent for unsoldinventory of houses for two years

Supreme Court

no hesitation to accept thismistake which occurred in the aforesaid judgment.”

startclaiming the exemption at the same rate of 100%beyond the period of five years

favour of the assessee.

linkingto be mandatorily completed till 31-3-2019

ground that the professional isout of station.

2. Deduction under section 80IC in case ofsubstantial expansion

3. Linking of Aadhaar number with PA No.

4. Seeking adjournment of hearing



However, in case you are out of station, forunavoidable reason like medical emergency, Ibelieve you can validly seek adjournment citingmedical emergency. A gullible lawyer soughtadjournment from the on the groundthat the learned counsel was out of station withoutciting the unavoidable reason, if any. In thebacklash that followed,

This was in Civil Appeal Nos.9142-9144 Of 2010 in case of Ram SiromaniTripathi & Ors. Versus State Of U.P. & Others

Apex Court

not only the adjournmentwas refused and the appeal dismissed, but an orderwas also passed saying that under nocircumstances, application for restoration of appealshall be entertained.

I. VALUATION

II. CLASSIFICATION

For determining the Assessable Value under theCustoms Valuation provisions, the value has to bearrived at on the basis of price actually paid andmentioned in Bills of Entry; the Transaction Valuecannot be rejected in absence of reasons toestablish that price was not the sole consideration oftransaction value.

[CCE&ST vs Sanjivani Non-Ferrous Trading Pvt Ltd –SC]

2.1 Under the Customs provisions, benefit was givenunder Notification 25/2005 to ‘electrical machineswith translation or dictionary functions; product ‘e-reading device’ was covered under Chapter 85. TheHonourable High Court, in the course of examiningthe classification of ‘Kindle’ device, observed thatthe exemption benefit was to an electrical machinewith translation and dictionary functions, whichimplied that translation and or dictionary functionshould be primary and relevant function of themachine for which they are purchased and used;hence, exemption cannot be extended to anymachine that primarily has other function and maybe capable of translation or dictionary functions,which are however not the primary functions.

[UoI vs Amazon Reseller Services Pvt Ltd – Delhi HC]

2.2 Where the appellant was acting as an ‘agent’ ofoverseas entity for sales promotion and marketingservices in respect of sales of its products to

Contributed by : CA. Anirudh Sonpalcan be reached at [email protected]

Judicial Decisions onIndirect Taxes

prospective customers in India, the servicesprovided were in the nature of ‘Intermediary’services as defined u/s 2(13) of the CGST Act,2017.Further, after-sales support services provided toIndian customers of the overseas entity cannotform a ‘composite’ supply with the sales promotionand marketing services.

[Toshniwal Brothers (SR) Pvt Ltd – Appellate AAR –Karnataka]

3.1 In case of interest on refund of pre-deposits, theHonourable High Court observed that refund wasdue and payable from the date the appeal wasallowed and interest was also payable from thisdate. The Honourable High Court observed thatpre-deposit was made to avail appellate remedyand does not necessarily assume the character of atax, especially when the appellant succeeded inthe appeal; filing of refund form is anadministrative measure and does not fix the periodof limitation for the amounts to be refunded.

[MRF Ltd vs Comm of Trade & Taxes – Delhi HC]

3.2 Where notice was issued u/s 87 of the Finance Act,1994 for recovery of service tax and attachment ofbank account, the Honourable High Court observedthat notice for attachment cannot be issued beforeissue of Show Cause Notice u/s73 of the FinanceAct,1994 for recovery of the tax due.

[M.P. Enterprises vs UoI – Bombay HC]

3.3 The assessee had collected service tax but failed todeposit the same; however, the assessee hadcorrectly declared the values in the service taxreturns filed and had declared the tax payable atthe relevel time. The service tax, with interest waspaid subsequently but before the Show CauseNotice was issued. It was observed that justbecause service tax was collected and not paid,intention to evade service tax was not establishedparticularly when correct disclosures were made inthe returns filed and the tax, with interest, was paidsubsequently.

[Onward E-Services Ltd vs CST, Mumbai – MumbaiCestat]

An assessee, registered in West Bengal, cannotclaim ITC of CGST & SGST paid on hotel andbanquet services to a supplier located in TamilNadu; the assessee can claim such ITC if also havingregistration in Tamil Nadu, being the place wherethe supplier is located.

[Storm Communications Pvt Ltd – AAR West Bengal]

III. REFUND & RECOVERY

IV. INPUT TAX CREDIT



SA 700 (Revised): Forming an Opinion & Reporting onFinancial Statements and

SA 701(New): Communicating Key Audit Matters in theIndependent Auditor’s Report

Effective date:

Background:

New style of audit reports - SA 700 (Revised):

New Key Audit Matters (“KAMs”) - SA 701:

Discussion:

Major Changes introduced in SA 700 (Revised):

Opinion para

Basis for opinion para

New affirmative Statement

The Standards on Auditing SA 700 (Revised) and SA701(New) shall be effective/applicable for audits offinancial statements for periods beginning on or afterApril 1, 2018.

Without changing the scope of an independent audit, thisrevised Standard on Auditing opens the door for theauditor to give users more insight into the audit, promoteconsistency in reporting and improve its transparency.The requirements of this SA are aimed at addressing anappropriate balance between the need for consistencyand comparability in auditor reporting globally and theneed to increase the value of auditor reporting by makingthe information provided in the auditor’s report morerelevant to users.

This is the most significant change introduced by the newrequirements i.e. the auditor is required to includedescription of key audit matters in the auditor’s report.

The Standard on Auditing-700 (Revised) deals with theauditor’s responsibility to form an opinion on thefinancial statements. It also deals with the form andcontent of the auditor’s report issued as a result of anaudit of financial statements.

– Audit opinion is positioned at thebeginning of the report rather than at the end.

– Earlier, the requirement toinclude this para in audit report was only in case ofopinion other than unmodified opinion. Now, thecited para needs to be included in audit report for alltypes of opinions.

– The statementrelating to independence and ethical requirementsissued by the Institute of Chartered Accountants of

�

�

�

Contributed by : CA. Rohit Parekh & CA. Jesa Modhwadiyacan be reached at

[email protected] & [email protected]

SA 700 (Revised)

& SA 701(New)

India (ICAI) needs to be explicitly mentioned in auditreport.

– Key AuditMatters (SA 701), mandatory for all listed entities.

– If there are anyother matters, they need to be presented inaccordance with SA 720 - “The auditor’sresponsibility in relation to other information indocuments containing Audited FinancialStatements”.

– To be included in both,management’s as well as auditor’s responsibilitiessections.

– “GoingConcern”

–Earlier only there was management responsibilitywhich was mandated to be described and not thosecharged with governance.

The auditor shall evaluate whether the financialstatements are prepared, in all material respects, inaccordance with the requirements of the applicablefinancial reporting framework.

To derive conclusions based onapplication of auditing procedures considered necessaryas to whether:

The financial statements adequately disclose thesignificant accounting policies selected andapplied;

The accounting policies selected and applied areconsistent with the applicable financial reportingframework and are appropriate;

The accounting estimates made by management arereasonable;

The information presented in the financialstatements is relevant, reliable, comparable, andunderstandable;

The financial statements provide adequatedisclosures to enable the intended users tounderstand the effect of material transactions andevents on the information conveyed in the financialstatements; and

The terminology used in the financial statements,including the title of each financial statement, isappropriate.

�

�

�

�

�

�

�

�

�

�

�

New Section Inserted in Audit Report

New Section on Other Matters

New descriptions of responsibilities relating togoing concern

Enhanced reporting requirements when a materialuncertainty related to going concern exists – Inaccordance with SA 570 (Revised)

Identification of those charged with governancewithin the management responsibilities section

Forming an Opinion on the Financial Statements:

Evaluation Process:

Inclusion of Key Audit Matters (KAMs) in audit report -



Significant change in the auditor’s report

Intended benefits of introduction of reporting KAMs:

Determination of KAMs - Three steps approach

Step 1:

Step 2:

�

�

�

�

�

�

KAMs have been defined to mean those matters that,in the auditor’s professional judgement, are of mostsignificance in the audit of the financial statementsof the current period. KAMs are selected frommatters communicated with those charged withgovernance.

As per the ICAI’s implementation guide on SA-701,KAMs, in most of the cases, would relate tosignificant or complex matters disclosed in thefinancial statements. For instance, valuation ofgoodwill and other long-term assets, valuation offinancial instruments, difficult or unique aspects ofrevenue recognition, assessment of impairment,taxation matters, accounting for significantacquisitions, etc.

Timely communication of KAM is likely to encouragemanagement and those charged with governance toenhance or make new disclosures in the financialstatements or other reports in light of the fact thatthe matter will be communicated in the auditor’sreport. For instance, providing robust informationabout the sensitivity of key assumptions used inaccounting estimates or an entity’s rationale for aparticular accounting practice.

KAM is expected toprovide additional information that may assist usersin understanding the entity and areas of significantmanagement judgement, the relevance of thematter etc in the audited financial statements.

KAMs should be identified from the matterscommunicated with those charged with governance.These matters could, inter alia, include the auditor’sresponsibilities in relation to the financial statementsaudit and significant findings from the audit.

From the matters communicated to those chargedwith governance, identify the matters that requiredsignificant auditor attention. These primarily relate tomatters that pose challenges to the auditor in forming anopinion or obtaining evidence that in his judgement wassufficient and appropriate under the circumstances.

An auditor is required to consider the following:

Areas of higher assessed risk of materialmisstatement, or significant risks identified

Significant auditor judgements relating to areas inthe financial statements that involved significantmanagement judgement, including accountingestimates that have been identified as areas of highestimation uncertainty

Management and those charged with governance:

Users of financial statements:

�

�

�

Effect on the audit, of significant events ortransactions that occurred during the period. Forinstance, matters which had significant effect onfinancial statements or the audit and significanteconomic, accounting, regulatory, industry or otherdevelopments that impacted the management’sassumptions and judgements.

An auditor needs to determine which of thematters identified in Step 2 were of most significance inthe audit of the financial statements of the current period.

Determining which, and how many, of those mattersthat required significant auditor attention and wereof most significance in the audit, is a matter ofprofessional judgement.

The aforesaid implementation guide clarified thatthere is no threshold for the number of KAMs thatneed to be communicated by an auditor. Differententities in the same industry can have differentKAMs as the identification of KAM depends on therisk assessment process of the auditor and entity-specific conditions and circumstances.

SA 701 and the ICAI’s implementation guide thereon,provide certain factors that could be considered whileidentifying matters of most significance. These, inter alia,include:

It is important to note that communicating KAMs in theauditor’s report is in the context of the auditor havingformed an opinion on the financial statements as a wholeand not a separate opinion on individual matters reportedas KAM.

In our view, the matters of most significance in our auditwere as follows:

Step 3:

Manner of communicating KAM

Illustrative presentation of KAM:

Key Audit Matters

(A) Litigations and claims

We refer to Note No. XXX of thef i n a n c i a l s t a t e m e n t s o n"Contingent liabilities" whereinit has been reported that thecases are pending with multipletax authorities.

In normal course of business,financial exposures may arisefrom pending proceedings.Whether a l iab i l i ty or acontingent liability is recognizedor disclosed in the financials t a t e m e n t s i s i n h e re n t l yuncertain and is dependent on an u m b e r o f s i g n i f i c a n tassumptions and judgments. Theamounts involved are potentially

How our audit addressed thematters

Our procedures, inter alia,included:

• E v a l u a t i n g t h emanagement’s judgment oftax risks, estimates of taxe x p o s u r e s a n dcontingencies by involvingtax specialists. Experts’opinions, past and currentexperience with the taxauthorities in the respectivej u r i s d i c t i o n s a n d t a xspecialists’ own expertisewere used to assess thea p p r o p r i a t e n e s s o fmanagement’s best estimateof the most likely outcome ofeach uncertain tax position.



significant and determining theamount, if any, to be recognizedor disclosed in the financialstatements , is inherent lysubjective.

• Reviewing legal expensesincurred during the auditedyear and sending letters tot h econsultants/lawyers/counsels providing services to theentity, inquiring aboutlitigations and actual orp o t e n t i a l c l a i m s a n ddisputes;

• Assessing the responsesreceived to the aboveinquires and discussingselected matters with theentity’s management;

• Reading minutes of them e e t i n g s o f t h emanagement of the entity,a n d a l s o i n s p e c t i n gc o r r e s p o n d e n c e w i t hregulators; and

• Critically assessing theentity’s assumptions andestimates in respect ofc l a i m s , i n c l u d i n g t h ec o n t i n g e n t l i a b i l i t i e sdisclosed in the financialstatements.

• A s s e s s m e n t o f t h eprobability of negative resulto f l i t i g a t i o n a n d t h ereliability of estimates ofrelated obligation.

Circumstances under which KAMs need not be reported:

Under the following circumstances, a matter determinedto be a KAM is not required to be communicated in theauditor’s report:

Law or regulation precludes public disclosure aboutthe matter.

The auditor determines, in rare cases, that the mattershould not be communicated in the auditor’s reportbecause the adverse consequences of doing sowould reasonably be expected to outweigh thepublic interest benefits of such communication. Thiswill not be applicable if the entity has publiclydisclosed information about the matter.

In such a case, a written representation frommanagement, and when appropriate, those charged withgovernance, could be obtained as to why publicdisclosure about the matter is not appropriate, includingmanagement’s view about the significance of the adverseconsequences that may arise as a result of suchcommunication.

Apart from the above, there could be very limitedsituations (such as listed entity with very limitedoperations) where there are no KAMs to becommunicated. However, in such a case also, KAM sectionwill be reported in the auditor’s report.

�

�

Contributed by : CA. Manilal Parsiyacan be reached at [email protected]

GST Update

Central Government videdated 31-12-2018 seeks to extend the time

period specified in notification No. 31/2018-CT dated06.08.2018 for availing the special procedure forcompleting migration of taxpayers who receivedprovisional IDs but could not complete the migrationprocess.

Central Government vide

dated 31-12-2018 extended the time limit forfurnishing the return in FORM GSTR-3B for the newlymigrated taxpayers.


extended the time limit for furnishing the details ofoutward supplies in FORM GSTR-1 for the newly migratedtaxpayers.

Central Government videdated 31-12-2018 exempted the supplies

made by Government Departments and PSUs to otherGovernment Departments and vice-versa from TDS.

Central Government videdated 31-12-2018 bought the Fourteenth

amendment to the CGST Rules, 2017.

Central Government videdated 31-12-2018 fully waived the amount of

late fees leviable on account of delayed furnishing of FORMGSTR-1 for the period July, 2017 to September, 2018 inspecified cases.

Central Government videdated 31-12-2018 specified the late fee

payable for delayed filing of FORM GSTR-3B and fully waivethe amount of late fees leviable on account of delayedfurnishing of FORM GSTR-3B for the period July, 2017 &September, 2018 in specified cases.

Central Government videdated 31-12-2018 fully waived off the

amount of late fees leviable on account of delayedfurnishing of FORM GSTR-4 for the period July-2017 toSeptember-2018.

Central Government videdated 31-12-2018 extended the due date for

furnishing FORM ITC-04 for the period starting from July-2017 to December-2018 till 31.03.2019.

Central Government videdated 31-12-2018 amended the notification

No. 2/2017 - Central Taxes dated 19.06.2017.


Notification No. 67/2018-Central Tax,

Notification No. 68/2018-Central Tax, 69/2018-Central Tax and 70/2018-CentralTax,

Notification No. 71/2018-Central Tax and 72/2018-Central Tax , dated 31-12-2018





Notification No.77/2018-Central Tax,



Notification No. 01/2019-



INTRODUCTION

BACKGROUND TO THE Z-SCORE

The Altman Z-Score is a quantitative balance-sheetmethod of determining a company’s financial health. Zscore is a formula for predicting corporate bankruptcy.The Z-score formula for predicting bankruptcy waspublished in 1968 by Edward I. Altman, who was, at thetime, an Assistant Professor of Finance at New YorkUniversity. The formula may be used to predict theprobability that a firm will go into bankruptcy within twoyears. Z-scores are used to predict corporate defaults andan easy-to-calculate control measure for the financialdistress status of companies in academic studies. The Z-score uses multiple corporate income and balance sheetvalues to measure the financial health of a company.

The Z-score is a linear combination of five commonbusiness ratios, weighted by coefficients. The coefficientsare estimated by identifying a set of firms which haddeclared bankruptcy and then collecting a matchedsample of firms which had survived, with matching byindustry and approximate size (assets). Altman appliedthe statistical method of discriminant analysis to adataset of publicly held manufacturers. The estimationwas originally based on data from publicly heldmanufacturers, but has since been re-estimated based onother datasets for private manufacturing, non-manufacturing and service companies. The original datasample consisted of 66 firms, half of which had filed forbankruptcy under Chapter 7 in USA. All businesses in thedatabase were manufacturers, and small firms with assetsof < $1 million were eliminated. In its initial test, theAltman Z-Score was found to be 72% accurate inpredicting bankruptcy two years prior to the event. Insubsequent tests over 31 years up until 1999, the modelwas found to be 80-90% accurate in predictingbankruptcy one year prior to the event. In 2009, MorganStanley strategy analyst, Graham Secker, used the Z-scoreto rank a basket of European companies. He found thatthe companies with weaker balance sheetsunderperformed the market more than two thirds of thetime. Morgan Stanley also found that a company with anAltman Z-score of less than 1 tended to underperform the

Contributed by : CA. Jalaj Chhayacan be reached at [email protected]

Z Score - A measure toevaluate corporate

bankruptcy

Central Tax,










Notification No. 11/2019-Central Tax and 12/2019-Central Tax,



dated 15-01-2019 seeks to amendnotification No. 48/2017 to amend the meaning ofAdvance Authorization.

Central Government videdated 29-01-2019 enforced the CGST

(Amendment) Act, 2018.

Central Government videdated 29-01-2019 amended the CGST Rules,

2017.

Central Government videdated 29-01-2019 seeks to amend

notification No. 2/2017-Central Tax dated 19.06.2017 soas to define jurisdiction of Joint Commissioner (Appeals).


notification No. 8/2017-Central Tax dated 27.06.2017 soas to align the rates for Composition Scheme with CGSTRules, 2017


notification No. 65/2017-Central Tax dated 15.11.2017 inview of bringing into effect the amendments (to alignSpecial Category States with the explanation in section 22of CGST Act, 2017) in the GST Acts.


furnishing of FORM GSTR – 7 for the months of October,2018 to December, 2018 till 28.02.2019.


furnishing of FORM GSTR – 7 for the month of January, 2019till 28.02.2019.

Central Government videdated 20-02-2019 seeks to extend the due

date for furnishing FORM GSTR-3B for the month of January,2019 to 28.02.2019 for registered persons having principalplace of business in the state of J&K; and 22.02.2019 forthe rest of the States.

Central Government videdated 07-03-2019 gave exemption from

registration to any person engaged in exclusive supply ofgoods and whose aggregate turnover in the financial yeardoes not exceed Rs 40 lakhs.

Central Government videdated 07-03-2019

seeks to prescribe the due dates for furnishing of FORMGSTR-1 for those taxpayers with aggregate turnover ofmore than Rs. 1.5 crores for the months of April, May andJune, 2019.

Central Government videdated 07-03-2019 seeks to prescribe the due

dates for furnishing of FORM GSTR-3B for the months ofApril, May and June, 2019.

Central Government videdated 07-03-2019 seeks to supersede

notification No. 08/2017 - Central Tax dated 27.06.2017 inorder to extend the limit of threshold of aggregate turnoverfor availing Composition Scheme u/s 10 of the CGST Act,2017 to Rs. 1.5 crores.



have a low asset turnover while grocery stores have a highturnover. But since the Z Score expects a value that iscommon to manufacturing, it could be biased in such away that a healthy jewelry store looks sick and a sicklygrocery store looks healthy.

To deal with these problems, Altman used his originaldata to calculate two modified versions of the Z Score,shown above. The Z Score is for public manufacturingcompanies; the Z1 Score is for private manufacturingcompanies; and the Z2 is for general use.

Z2 = 6.56*X1 + 3.26*X2 + 6.72*X3 + 1.05*X4A

Now lets us break down the Z score elements

1. Working Capital/Total Assets (WC/TA)

This ratio is a good test for corporate distress. A firmwith negative working capital is likely to experienceproblems meeting its short-term obligationsbecause there simply is not enough current assets tocover those obligations. By contrast, a firm withsignificantly positive working capital rarely hastrouble paying its bills.

2. Retained Earnings/Total Assets (RE/TA)

This ratio measures the amount of reinvestedearnings or losses, which reflects the extent of thecompany's leverage. Companies with low RE/TA arefinancing capital expenditure through borrowingsrather than through retained earnings. Companieswith high RE/TA suggest a history of profitability andthe ability to stand up to a bad year of losses.

3. Earnings Before Interest and Tax/Total Assets(EBIT/TA )

This is a version of return on assets (ROA), aneffective way of assessing a firm's ability to squeezeprofits from its assets before factors like interest andtax are deducted.

4. Market Value of Equity/Total Liabilities (ME/TL)

This is a ratio that shows - if a firm were to becomeinsolvent - how much the company's market valuewould decline before liabilities exceed assets on thefinancial statements. This ratio adds a market valuedimension to the model that isn't based on purefundamentals. In other words, a durable marketcapitalization can be interpreted as the market'sconfidence in the company's solid financial position.

5. Sales/Total Assets (S/TA)

This tells investors how well management handlescompetition and how efficiently the firm uses assetsto generate sales. Failure to grow market sharetranslates into a low or falling S/TA.

The Altman Z-Score is a measure of a company’s healthand likelihood of bankruptcy.

INTERPRETATION OF ALTMAN S Z-SCORE

wider market by more than 4%.

The results indicated that, if

The Z-score results usuallyhave the following "Zones" of interpretation:

1. Z Score above 2.99 -“Safe” Zones. The company isconsidered ‘Safe’ based on the financial figures only.

2. 1.8 < Z < 2.99 -“Grey” Zones. There is a good chanceof the company going bankrupt within the next 2years of operations.

3. Z below 1.80 -“Distress” Zones. The score indicates ahigh probability of distress within this time period.The Z-score has subsequently been re-estimatedbased on other datasets for private manufacturingcompanies, as well as non-manufacturing / servicecompanies.

The Z-score formula for publically traded companies is asfollows

Z = 1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + 1.0T5

1. T1 = Working Capital / Total Assets. This measuresliquid assets as firm in trouble will usuallyexperience shrinking liquidity.

2. T2 = Retained Earnings / Total Assets. This indicatesthe cumulative profitability of the firm, as shrinkingprofitability is a warning sign.

3. T3 = Earnings Before Interest and Taxes / TotalAssets. This ratio shows how productive a companyin generating earnings, relative to its size.

4. T4 = Market Value of Equity / Book Value of TotalLiabilities. This offers a quick test of how far thecompany's assets can decline before the firmbecomes technically insolvent (i.e. its liabilitiesexceed its assets).

5. T5 = Sales/ Total Assets. Asset turnover is a measureof how effectively the firm uses its assets togenerate sales

The usefulness of the original Z score measure waslimited by two of the ratios.The first ratio is T4, the MarketValue of Equity divided by Total Liabilities. Obviously, if afirm is not publicly traded, its equity has no market value.To deal with this, there is a revised Z score for privatecompanies:

Z1 = .717*T1 + .847*T2 + 3.107*T3 + .42*T4A + .998*T5(in this case, T4 = Book Value of Equity / Total Liabilities).

The other problem is X5, Assets Turnover. This ratio variessignificantly by industry. Jewelry stores, for example,

the Altman Z-Score is close toor below 3, it is wise to do some serious due diligencebefore considering investing.

CALCULATION

A. FOR PUBLIC COMPANIES

B. FOR PRIVATE COMPANIES

C. FOR MANUFACTURING COMPANIES



Input Financial Ratio 1999 2000 2001

X1 Working capital/ Total Assets -0.09 -0.08 0

X2 Retained earnings/Total Assets -0.02 0.03 0.04

X3 EBIT/Total Assets .09 .08 .02

X4 Market Value/Total Liabilities 3.7 1.2 .50

X5 Sales/Total Assets 0.51 0.42 0.3

Z-score 2.5 1.4 .85

Year 2006 2007 2008 2009 2010

Sales 4080 4110 3820 3280 2820

Earnings Before Interest& Taxes 173 -137 6.6 -149 -94.9

Current Assets 1640 1720 1510 1070 988

Total Assets 2570 2610 2300 1610 1430

Current Liabilities 1310 1600 1470 994 928

Total Liabilities 1640 1970 1830 1350 1270

Retained Earnings 614 438 250 63.8 -45.6

Working Capital÷Total Assets 0.13 0.05 0.02 0.05 0.04

Retained Earnings÷Total Assets 0.24 0.17 0.11 0.04 -0.03

Earnings Before Interest &Taxes ÷ Total Assets 0.07 -0.1 0 -0.1 -0.07

Market Value of Equity ÷Total Liabilities 0.85 0.51 0.19 0.02 0.06

Sales ÷ Total Assets 1.59 1.57 1.66 2.04 1.97

Z-Score 2.81 2 1.96 1.86 1.79

1. Z-SCORE ABOVE 3.0 –The Company is considered‘Safe’ based on the financial figures only.

2. Z-SCORE BETWEEN 2.7 and 2.99 – ‘On Alert’. Thiszone is an area where one should ‘Exercise Caution’.

3. Z-SCORE BETWEEN 1.8 and 2.7 – Good chance of thecompany going bankrupt within 2 years ofoperations from the date of financial figures given.

4. Z-SCORE BELOW 1.80- Probability of FinancialCatastrophe is Very High.

To demonstrate the power of the Z-score, let's look at howit holds up with a tricky test case. Consider the infamouscollapse of telecommunications giant WorldCom in 2002.WorldCom's bankruptcy created $100 billion in losses forits investors after management falsely recorded billionsof dollars as capital expenditures rather than operatingcosts. Here we calculate Z-scores for WorldCom usingannual 10-K financial reports for years ending December31, 1999, 2000 and 2001. Indeed, WorldCom's Z-scoresuffered a sharp fall. Also note that the Z-score movedfrom the gray area into the danger zone in 2000 and 2001,before declaring bankruptcy in 2002.

ILLUSTRATION- WORLDCOM

But WorldCom management cooked the books, inflatingthe company's earnings and assets in the financialstatements. What impact do these shenanigans have onthe Z-score? Overstated earnings likely increase theEBIT/total assets ratio in the Z-score model, butoverstated assets would actually shrink three of the otherratios with total assets in the denominator. So the overallimpact of the false accounting on the company's Z-scoreis likely to be downward.

As an example of how to calculate and interpret the Z-Score, we use Border’s Group, which filed for bankruptcyon February 16, 2011. While hindsight is always 20/20,we can use this case to see whether the Z-Score wouldhave raised a red flag regarding the company’s solvency.Table below shows the financial statement data requiredto calculate Z-Scores for Borders. We provide five years ofdata to give an idea of the trend in Borders’ Z-Score priorto its bankruptcy filing in 2011. In 2006, Borders was inthe “gray area” with a score of 2.81. The score declinedsteeply in 2007 to 2.00, as earnings before interest andtaxes (EBIT) went negative and working capital and

ILLUSTRATION-BORDERS GROUP

retained earnings also dipped. Borders’ Z-Score fell everyyear between 2006 and 2010, landing in the danger zoneat 1.79 in 2010. The next year, the company was bankrupt.When analyzing the Z-Score of a company, it is importantto analyze the trend over time. In the case of Borders, thesteady decline should have been a warning sign toinvestors.

Financial Data (in $ millions)

WHERE Z SCORES FALLS SHORT

CONCLUSION

Finally, the Z-score is not perfect and needs to becalculated and interpreted with care. For starters, the Z-score is not immune to false accounting practices. AsWorldCom demonstrates, companies in trouble may betempted to misrepresent financials. The Z-score is only asaccurate as the data that goes into it. The Z-score also isn'tmuch use for new companies with little or no earnings.These companies, regardless of their financial health, willscore low. Moreover, the Z-score doesn't address the issueof cash flows directly, only hinting at it through the use ofthe net working capital-to-asset ratio. After all, it takescash to pay the bills. Finally, Z-scores can swing fromquarter to quarter when a company records one-timewrite-offs. These can change the final score, suggestingthat a company that's really not at risk is on the brink ofbankruptcy.

To keep an eye on their investments, investors shouldconsider checking their companies' Z-score on a regularbasis. A deteriorating Z-score can signal trouble aheadand provide a simpler conclusion than the mass of ratios.Given its shortcomings, the Z-score is probably betterused as a gauge of relative financial health rather than asa predictor. Arguably, it's best to use the model as a quickcheck of financial health, but if the score indicates aproblem, it's a good idea to conduct a more detailedanalysis. Source: Investopedia, Stockpedia, extracts frompaper of Altman published in 2000, wikipedia



Photo Gallery

Live Screening of Union Budget 2019-20on 01.02.2019

Lecture Meeting On UDIN & New RequirementsUnder MCA on 09.02.2019

Government Subsidies & Emerging Trends inBusiness Finance for MSMEs on 26.02.2019

Lecture Meeting on Interim Budget 2019 &Corporate Succession Planning on 14.02.2019

St

ud

yC

irc

le

Panel Discussion – Tax & Financial Considerationin M&A transactions on 05.02.2019

A talk show on work profile, opportunities andcareer prospects for a CA in Media, DueDiligence and corporate finance, Start-ups andService Sector Industry on 16.02.2019

Important Aspects of Cyber LawsOne must know on 12.02.2019

Birthday Celebration Event Business of Life is not “Business” on 27.02.2019


MARCH 2019Volume - II

DISCLAIMER :

[email protected]/[email protected]

The ICAI and the Baroda Branch of WIRC of ICAI is not in any way responsible for the result of any action taken on the basis of the advertisement published in theNewsletter. The members, however, may bear in mind the provisions of the Code of Ethics while responding to the advertisements. The views and opinion expressed or impliedin the Newsletter are those of the authors / contributors and do not necessarily reflect those of Baroda Branch. Unsolicited matters are sent at the owner's risk and thepublisher accepts no liability for loss or damage. Material in this publication may not be reproduced, whether in part or in whole, without the consent of Baroda Branch.Members are requested to kindly send material of professional interest to The same may be published in the newslettersubject to availability of space & editorial editing.

Baroda Branch of WIRC ofThe Institute of Chartered Accountants of India

www.baroda-icai.org WIRC : www.wirc-icai.org ICAI: www.icai.orgl l

Half Page (1 Color) 5,500

* Discount - 3 to 6 issue of 10%, 7 to 12 issue 15% * Circulated to more than 2200 Chartered Accountants

ADVERTISEMENTS :SUBSCRIPTION RATES :

PUBLISHED BY :PUBLISHED AT

Designed by

The tariff for advertising given below are duly approved by the Managing Committee of the Baroda Branch. Advertisements are received directly by theBranch and no advertising agency has been appointed for this purpose. This Newsletter is circulated without any charges to its members and otherimportant categories of recipients as per ICAI Advisory on Newsletters. Subscription rate is Rs. 20/- per issue for others. CA. Hitesh Agrawal on behalf of BarodaBranch of WIRC of ICAI “ICAI Bhawan”, Kalali-Tandalja Road, Atladra, Vadodara - 390 012

Multiprints, 30/B, Gandhi Oil Mill Compound, Near BIDC, Gorwa, Vadodara - 390 016. Ph.: 0265-228 5592

“ICAI Bhawan”, Kalali-Tandalja Road,

Atladra, Vadodara - 390 012.

+91 265 268 0593 85110 77115 / 0265 268 1115 (DCO)Telefax : M:

8,500

THE INSTITUTE OF CHARTEREDACCOUNTANTS OF INDIA

Tel. : E-mail :Web :

ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi - 110 002.+91 (11) 3989 3989 | [email protected]

WESTERN INDIA REGIONAL COUNCIL

Tel. : Email :Web :

ICAI Tower, Plot no C-40, G Block, Opp MCA Ground, Bandra Kurla Complex,Bandra (E), Mumbai - 400 051

+022 - 3367 1400 / 3367 1500 | [email protected]

Back Cover (4 color) 16,500 Inside Front/Back Cover (4 color) Full Page (1 Color)

ADVERTISEMENT RATE :

11,000

Date post:	21-Oct-2019
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

NEWSLETTER - MARCH 2019 -...

Documents