Corporate Compliance Cleanup – expect a few MSME casualties

Brendon Pereira / September 19

Irrespective of one’s opinion on the economic reforms and their implementation over the past few years, there is little doubt that there has been a tumultuous change in the way companies and their auditors & CS’s perceive statutory compliance and reporting requirements these days. Especially true for Micro, Small & Medium Enterprises (MSME) that have hitherto treated compliance and reporting as something only their CA’s / CS’s had to bother about or (regrettably) ‘fix’.

With the tightening of norms, digitization and integration (transparency & access) across agencies, the much-needed cleanup of compliance & reporting is well and truly under way, and how! This can only have positive implications for the economy in the long run. Companies that already have inculcated a culture of robust compliance & reporting are cautiously optimistic and guardedly pleased with the leveling of the playing field. (Think rampant default/delays of Service Tax remittances which were utilized as working capital thus destroying the need to be efficient or compliant)

Conversely, companies that have been lax in this regard are now faced with a past & present clean-up that is going to overwhelm many.

It is pertinent to note that not all non-compliance or short cuts in reporting have a mala fide genesis. It has mostly been rooted in lack of knowledge (convoluted, bureaucratic procedures are to blame) and the cost – benefit equation (easier & cheaper to ‘fix’ deficiencies rather than invest in robust systems and competent resources). This is rapidly changing. Auditors have become increasingly circumspect, cautious and diligent in signing off financials. The level of scrutiny has drastically improved thus forcing companies to improve their accounting standards.

However, it is not all good news.

Compliance & reporting costs have thus increased substantially, both directly & indirectly. Further, since many regulations are recent and many, they are not yet fully understood and common interpretation is still some distance away. This is causing unintended consequences that can be fatal for companies.

A case in point is the uncertainty around GST returns. We are still nowhere close to completing FY 17-18 annual returns despite several extensions. Companies and auditors are obviously finding it impossible to comply with GSTR-9 & 9C requirements while reconciling them with the ITR & ROC filings for that fiscal. Compounding the issue is the fact that GST is effective from June 1st, 2017, leaving Q1 of FY 17-18 under the ambit of the erstwhile Service Tax regime. Now, in the ordinary course of business there are myriad transactions between buyer and seller involving invoicing, delivery, returns, partial delivery & returns, advance payments, delayed payments, credit notes, revised invoices, TDS remitted either against invoice or payment etc among others. Therefore, getting your GTSR1 & GSTR2 to match your customers and then all of it to match your monthly GSTR3B is not going to be easy. If that is not work enough, getting your GST return and Service Tax for Q1 to reconcile with ROC, ITR filings already made during that year is causing much consternation since such concurrent reconciliation was probably not carried out during the period in question. The real fear is the possibility of impending action by authorities in terms of fines, penalties and prosecution if returns do not match. Are we looking at a situation two-three years down the line wherein ghosts of returns past come to haunt companies & auditors?

Another example of such technical / operational issues around GST are the demand notices being sent out by respective Commissionerate’s on delayed GSTR3B filings. Often the liability mentioned in these demands vary substantially from the liability computed by the company. This gives rise to two fundamental questions: (i) how did the department calculate the liability (ii) is the department / system reconciling the demand amount and actual remittance? Are these discrepancies going to cause assessment issues down the line?

These are just a sample of practical on ground issues that are caused either by technical glitches in the system or rules not comprehensive enough. Small companies just do not have the wherewithal to deal with these potential issues. Further, since annual returns for FY 17-18 are still incomplete, no one is paying attention to similar issues in FY 18-19 while we are halfway through FY 19-20.

While we must welcome the move towards greater transparency, compliance and a clean-up of the system and bear the painful transition toward a healthier economy, lets also brace for some casualties along the way.