Substantial progress has been seen in ensuring clarity, transparency, and enabling e-compliance. Additionally, a pan-India sensitisation exercise is being undertaken by the Tax Policy Research Unit (TPRU) regarding India’s engagement with the B-READY assessment.
Transformation of the direct tax framework from enforcement/deterrence toward simplicity and voluntary compliance is core to achieving Viksit Bharat@2047. Landmark initiatives include the Transparent Taxation – Honouring the Honest platform (Faceless Assessment, Appeals, and Taxpayers Charter) and the Jan Vishwas Act, 2023. The Jan Vishwas Act decriminalized 183 provisions across 42 Acts to promote EoDB and Ease of Living.
The Union Budget 2026-27 drives the EoDB agenda through several key direct tax reforms:
Through these reforms, India takes a decisive step toward global governance benchmarks. This transformation embodies the Government’s vision of a modern, trust-driven direct tax regime that empowers citizens, strengthens transparency, and reinforces the commitment to fair taxation.
The following is the full text of the article titled Union Budget 2026: Recalibrating India’s Transfer Pricing and Cross-Border Tax Framework, authored by CA. Rishabh Agarwal and CA. Praneeth Narahari, as published in the March 2026 issue of The Chartered Accountant journal:
Union Budget 2026: Recalibrating India’s Transfer Pricing and Cross-Border Tax Framework
CA. Rishabh Agarwal & CA. Praneeth Narahari
Members of the Institute
The Union Budget 2026 was announced by the Hon’ble Finance Minister of India on 1st February, 2026. It demonstrates a significant shift in India’s international tax policy, shifting the focus on fine-tuning of a framework for greater certainty. Instead of limiting changes to rate adjustments or procedural refinements, the Finance Bill, 2026, recalibrates the key aspects of the transfer pricing regime. The primary focus is on dispute prevention & resolution, systematic management of technical defaults, and strict enforcement of statutory timelines to improve closure discipline.
This article details the key international taxation initiatives within the Finance Bill, 2026, which impact transfer pricing and cross-border taxation. Emphasis is on compliance rationalization as well as enhancement of Safe Harbour and APA mechanisms, with specific focus on the IT services sector, and the evolution of tax systems targeting digital infrastructure. It also offers a synopsis of the consequences these amendments may have on the compliance side for multinational groups, ranging from governance to visibility in planning.
Summary of the Finance Bill, 2026
The Finance Bill, 2026 introduces a set of reforms that:
- Soften the compliance issues for technical TP defaults.
- Tighten APA implementation across group entities.
- Tie digital-infrastructure incentives with administrable TP certainty, building out a certainty regime for the IT services sector.
- Tighten procedural certainty on TP/DRP timelines and limit annulments on the basis of limitation.
The Bill proposes to amend the fixed penalty exposure for failure to furnish the accountant’s report for international/specified domestic transactions with a tiered fee regime linked to the length of time of delay. It signals a shift in approach where compliance discipline is retained, but the response to procedural delay becomes proportionate rather than punitive. Alongside this, the Safe Harbour certification ecosystem is supported through a rationalisation of the accountant definition, aimed at easing access and operational frictions in dispute-prevention entry points.
The Bill addresses a known implementation gap by enabling associated enterprises covered by an APA (not only the applicant) to align return positions through return/modified return filing within a prescribed statutory window, limited to the APA’s scope. This improves group-level coherence and reduces residual disputes arising from correlative impacts of APA outcomes.
The Bill provides long-term tax certainty for foreign participation in India’s data centre and cloud ecosystem through an extended exemption window for specified procurement models, while preserving tax jurisdiction over India-facing revenue streams via structuring conditions. Complementing this, a Safe Harbour margin for related-party data centre services introduces a clear pricing rule for a segment where benchmarking disputes are structurally frequent.
The Bill consolidates dispute prevention for IT services by expanding Safe Harbour eligibility, shifting processing towards rule-driven automation, providing multi-year pricing continuity once opted, and fast-tracking unilateral APAs through a defined completion timeline with a taxpayer-request extension. The reforms, in aggregate, are intended to shift routine IT/ITeS pricing out of an extended controversy cycle into certainty predictable resolutions.
Further, the bill reinforces procedural certainty in TP and DRP assessments by codifying limitation mechanics that have driven technical litigation. It clarifies the computation of the sixty-day TPO order buffer (including leap-year treatment) and aligns timelines across the 1961 Act and the Income-tax Act, 2025. It also ring-fences DRP finalisation timelines from general limitation rules, reducing limitation-based annulments.
Overall, the package signals a clear direction: certainty-first administration for scaled cross-border service models, reduced controversy for technical defaults, and better operational alignment of APA outcomes across group entities.
Procedural Rationalisation and Compliance Liberalisation
Decriminalisation of Technical Transfer Pricing Defaults
Legislative Amendment: Under the earlier framework of the Income-tax Act, 2025, Section 447 provided for a penalty of ₹1,00,000 for failure to furnish the report from an accountant as required under Section 172, which relates to reporting of international transactions or specified domestic transactions.
Rationale: The previous regime imposed the same penalty regardless of the time of delay. The amendment attempts to:
- Decriminalise technical non-compliance,
- Introduce proportionality through graded fees, and
- Distinguish procedural lapses from substantive tax violations.
Impact Assessment: The reform reduces adversarial escalation in routine compliance and aligns enforcement with international documentation standards. Substituting punitory penalties with proportionate monetary levies, it improves the compliance framework without weakening reporting obligations.
Rationalised Definition of “Accountant”
Legislative Amendment: The Hon’ble Finance Minister, in her speech, also announced to revise the definition of “accountant” for the purposes of the Safe Harbour Rules by widening professional eligibility under the certification framework. The change is primarily financial in nature, aimed at easing entry barriers for practitioners. Under the revised thresholds:
- The annual professional receipt limit for individual practitioners or valuers is reduced from ₹1 crore to ₹50 lakhs.
- For firms or entities engaged in accountancy or valuation services, the ceiling is lowered from ₹10 crores to ₹3 crores.
Importantly, the qualitative safeguards remain intact. The minimum ten-year professional experience requirement continues to apply, as does the condition relating to multi-country presence wherever relevant. Recognition of foreign-qualified professionals is also retained.
Rationale: Previously, the higher receipt thresholds effectively limited participation to larger firms, restricting access for competent mid-sized practices. The revision is intended to widen the certification base without relaxing experience or competence criteria.
Enhancing APA Efficacy for Associated Enterprises
Legislative Amendment: Section 169(1) now permits both the APA applicant and any affected associated enterprise to file a return or modified return, restricting to the matters falling within APA’s scope. Such filings must be made within three months from the end of the month in which the APA is entered into, and applies to agreements entered into on or after 1 April 2026 and to tax years commencing thereafter.
Rationale: In practice, transfer pricing adjustments under an APA frequently generate a corresponding effect across multiple group entities. Limiting the modified return facility to the APA applicant created structural imbalance and administrative rigidity in implementing group-level outcomes where the associated enterprises are also liable to tax in India. The amendment addresses this structural gap by enabling alignment of tax positions among group entities.
Impact Assessment: By means of extension of the modified return facility to AEs, the reform facilitates corresponding adjustments at the group level. Affected entities can realign their tax positions and, where relevant, seek refunds of taxes previously paid or withheld that no longer reflect the agreed APA pricing. This adjustment removes earlier administrative rigidity and supports coordinated implementation of APA outcomes. In doing so, it mitigates double taxation risk and reduces the likelihood of post-APA disputes.
Fast Track Unilateral APAs for IT Services
Legislative Amendment: Draft rule 109 of the Income-tax Rules, 2026 (Erstwhile Rule 10L of Income-tax Rules, 1961) introduces defined timelines for concluding unilateral APAs. A new sub rule 3 has been added which states that a unilateral agreement be finalised within one year from the end of the financial year in which application is accepted for processing. Further, newly inserted sub rule 13 & 14 states that if a unilateral APA application for IT services is not concluded within two years from the end of the quarter in which it was filed, the proceedings are deemed to be closed automatically. However, the law allows the assessee to formally request an additional extension of six months beyond the initial two-year limit. This effectively allows a maximum window of up to two and a half years.
Rationale: This procedural mandate aligns with the government’s strategic objective to provide forward visibility and certainty in transfer pricing governance for India’s global leadership in software and IT-enabled services.
Impact Assessment: The proposed APA timelines materially re-balance the unilateral APA process towards time-bound certainty and administrative accountability, particularly for IT/ITeS transactions where volume is high and fact patterns are repeatable. Introducing a wherever possible one-year completion objective signals an institutional expectation of faster closures, which should improve forward pricing visibility and reduce the commercial cost of prolonged uncertainty. More importantly, the automatic closure mechanism for IT-services unilateral APA applications that remain unresolved after two years creates a hard outer boundary that is likely to compress internal processing timelines and reduce indefinite pendency, which has historically been one of the primary practical limitations of APAs as a dispute-prevention tool. Overall, the change should increase the attractiveness of unilateral APAs for routine IT service models, but it will also reward disciplined documentation, early issue crystallisation, and proactive engagement to ensure that certainty is achieved within the statutory window.
Tax Architecture for Digital Infrastructure and Cloud Ecosystems
Long-Term Tax Certainty for Foreign Data Centre Procurement
Legislative Amendment: The Finance Bill, 2026 amends Schedule IV of the Income-tax Act, 2025 to provide an exemption to a foreign company in respect of income accruing or arising in India, or deemed to accrue or arise in India, from procurement of data centre services from a specified data centre, for a period up to the tax year ending 31 March 2047. The explanatory memorandum indicates that this measure is intended to incentivise long-term investment in India’s data centre ecosystem and support the growth of an advanced digital infrastructure, including AI-driven capacity expansion.
Rationale: Large-scale data centre infrastructure and AI-based digital ecosystems are capital intensive, have long asset life cycles, and operate on long-term revenue models. Such investments require predictable tax treatment over extended periods. The amendment is intended to enhance India’s attractiveness as a regional cloud and digital infrastructure jurisdiction, provide long-term fiscal certainty to foreign operators, and facilitate expansion of high-capacity data centre and AI-linked infrastructure within India.
Impact Assessment: The extended exemption window strengthens India’s positioning as a regional cloud and hyperscale infrastructure hub. It enhances investor confidence while preserving domestic tax jurisdiction over Indian customer revenues. At the same time, the reseller-based servicing model preserves domestic tax jurisdiction in respect of Indian customers.
Safe Harbour for Related-Party Data Centre Services
Legislative Amendment: A Safe Harbour has been introduced for data centre services provided from India to a related foreign entity, prescribing a 15% mark-up on operating cost as the arm’s length price for such international transactions. The measure was announced in the Union Budget Speech, indicating a margin of 15 percent on cost for such services. Further, this 15% operating profit margin is proposed to be incorporated within the Safe Harbour provisions of the Draft Income-tax Rules, 2026.
Rationale: Intra-group data centre service arrangements typically involve infrastructure-intensive operations with limited external comparables, leading to frequent benchmarking disputes. The introduction of a fixed Safe Harbour margin seeks to provide certainty in pricing, reduce interpretational disputes, and simplify transfer pricing compliance for digital infrastructure service models.
Impact Assessment: The Safe Harbour delivers upfront pricing certainty, reduces documentation complexity, and enables scalable operating models for multinational digital groups. It complements the long-term exemption regime and creates a vertically integrated digital tax framework.
Integrated Certainty Framework for the IT Services Sector
Scale Expansion of Safe Harbour Eligibility
Legislative Amendment: The turnover threshold for availing Safe Harbour in respect of IT services has been enhanced from ₹300 crores to ₹2,000 crores. Further, India is a global leader in business segments such as software development, IT enabled services (ITES), KPO, and contract R&D services. All these services are proposed to be clubbed under a single category of "Information Technology Services". This substantially widens the class of IT service providers eligible to opt for the Safe Harbour regime.
Rationale: The earlier framework limited Safe Harbour access largely to smaller service providers. As the IT services sector expanded in scale and global integration, a significant segment of mid-sized and large enterprises remained outside the certainty mechanism. Further, the earlier Safe Harbour Rules had margins ranging from 17-24% for IT services which were quite inter-connected; thus, there was a need to simplify and cover all IT services under a single Safe Harbour rate. The enhanced threshold aligns the Safe Harbour framework with the current scale of operations in the IT industry.
Impact Assessment: The substantial enhancement of the turnover threshold to ₹2,000 crores democratizes access to tax certainty, enabling a significant segment of mid-sized and large IT enterprises to bypass protracted transfer pricing audits. A uniform, competitive, fixed 15.5% margin is prescribed for this integrated segment, which reduces classification disputes and simplifies compliance.
Automated Processing and Five-Year Pricing Validity
Legislative Amendment: The Union Budget 2026 announced that the Safe Harbour regime for IT services would shift to an automated, rule-based processing model, removing the requirement for an officer-level examination. The Draft Income-tax Rules, 2026 propose electronic filing of Form 49, system-based verification of eligibility conditions, and electronic communication of decisions. Additionally, where the Safe Harbour option is validly exercised, it shall be applicable for five consecutive tax years.
Rationale: The need for manual verification and re-verification year-on-year is debatable, and the scope for administrative delay is high. Hence, the reform is intended to reduce subjectivity and compliance inefficiencies by making the process automated and by allowing multi-year pricing continuity.
Impact Assessment: Under this provision, the option of a five-year Safe Harbour is very critical for multinationals, as it will help them in long-term fiscal planning for their Indian operations. This will mitigate the litigation uncertainties in the most critical service sector of India.
Strengthening Procedural Certainty in TP and DRP Proceedings
Clarifying TPO Order Timelines and Computation
Legislative Amendment: The Finance Bill, 2026 has now made explicit time limits within which the Transfer Pricing Officer (TPO) has to pass an order. The revised Section 166(7) of the Income-tax Act, 2025 has drafted a systematic link between the assessment limitation period and the outer date on which the TPO’s order must be issued, including specific guidance for leap years.
Rationale: The change addresses a long-standing interpretational dispute concerning how the sixty-day timeline under Section 92CA(3A) is to be computed. While the legislative intent has consistently been to include the limitation date in computing the sixty-day period, certain judicial decisions excluded it. As a result, assessments were quashed on narrow procedural issues. The controversy has created unavoidable litigation and revenue leakage despite there being a clear sixty-day buffer in practical terms. Clearer drafting ensures uniformity across both the Income-tax Act, 1961 and the Income-tax Act, 2025.
Impact Assessment: By prescribing a uniform method of computing the sixty-day period, the amendments reduce reliance on judicial interpretations that excluded the limitation date. This significantly reduces the risk of assessments being struck down on timing grounds rather than merits. For ongoing and future cases, TPO timelines and downstream assessment timelines become clearer and less vulnerable to last minute limitation challenges. Disputes are likely to shift back to substantive issues like comparability analysis and margins.
Clarification of Time Limits under Section 275 (DRP Mechanism)
Legislative Amendment: Through the Union Budget 2026, Section 275 of the Income-tax Act, 2025 has been amended to clarify the interaction between the DRP framework and the general limitation provisions under Sections 286. The amendment makes it explicit that while Sections 286 govern the outer time limit up to the draft order stage, the one-month period prescribed for completion of assessment after DRP directions shall apply notwithstanding the limitation framework under Sections 286. Corresponding amendments have been made in Section 144C of the Income-tax Act, 1961.
Rationale: The amendment is driven by the need to restore certainty and coherence in the time-limit framework governing assessments routed through the Dispute Resolution Panel (DRP). Despite the statutory design that provisions function independently of general limitation frameworks, judicial interpretation has not been uniform. Divergence has heightened litigation exposure on limitation grounds, particularly in high-value cases.
Impact Assessment: The clarification is likely to have immediate practical consequences for transfer pricing assessments. By prescribing a uniform method, the amendment curtails reliance on judicial interpretations that excluded the limitation date. This significantly reduces the risk of assessments being struck down on timing grounds rather than arm’s length analysis. For current and future cases, disputes are anticipated to return to the substance of comparability analysis, margins, and adjustments.
Conclusion
The Union Budget 2026, along with the Draft Income-tax Rules, 2026, introduces a deliberate move towards certainty in India’s transfer pricing and cross-border framework. The policy agenda is reflected in three key areas: increased automation, proportionate consequences for technical defaults, and expanded access to dispute prevention mechanisms. Replacing a fixed penalty for TP reporting defaults with a graded fee structure reduces adverse clashes whilst upholding discipline.
The APA related changes are equally significant. Extending the modified return facility to associated enterprises closes a structural gap and is likely to reduce economic double taxation. Defined timelines for unilateral APAs in the IT services segment introduce clearer administrative discipline. They also align tax policy with India’s digital infrastructure ambitions through long-term exemptions and fixed Safe Harbour margins for data centers.
Finally, the reforms add certainty in TP and DRP workflows by structuring timeline computations and stopping litigation over the sixty-day buffer. For multinationals, the message is that certainty mechanisms are being extended and made into a system. Taxpayers will benefit if they adopt these mechanisms early with robust documentation and governance.
The following is the full text of the article titled Union Budget 2026-27 Highlights: Impact on MSMEs, authored by CA. Vishal Thappa, as published in the March 2026 issue of The Chartered Accountant journal:
Union Budget 2026-27 Highlights: Impact on MSMEs
CA. Vishal Thappa
Member of the Institute
The Union Budget 2026-27 presents a balanced framework aimed at accelerating economic growth and development. Described as a “Yuva Shakti-Driven Budget,” it focuses on unlocking entrepreneurial potential by improving liquidity access, expanding risk capital availability, and strengthening institutional guidance for small businesses.
According to the Economic Survey 2025–26, MSMEs are the backbone of the nation's economy, contributing:
- 35.4% of manufacturing output.
- 48.58% of total exports.
- 31.1% to GDP.
- 34.03 Crore in employment.
- 7.47 Crore MSMEs across the country.
The Budget is inspired by Three Kartavyas: Economic Growth, Capacity Building, and Universal Access.
Key MSME Initiatives under the Union Budget 2026
1. INR 10,000 crore SME Growth Fund
This represents a structural intervention to provide growth-stage capital. Unlike traditional credit-linked schemes, it provides equity and quasi-equity support to high-performing and scalable MSMEs. This shift from pure debt financing improves debt-equity ratios and enhances creditworthiness, acknowledging that established MSMEs need institutional capital to compete globally.
2. INR 2,000 crore top-up to Self-Reliant India (SRI) Fund
This top-up specifically targets micro enterprises. The SRI Fund operates on a mother fund–daughter fund architecture to deploy risk capital. As of January 2026, cumulative investment stood at approximately ₹16,743 crore. The new infusion ensures smaller players can adopt modern technologies and expand capacity.
3. Liquidity Support Through TReDS Reforms
To address systemic challenges regarding delayed payments, the Budget introduces a four-pillar reform for the Trade Receivables Discounting System (TReDS):
- Mandatory TReDS Usage for CPSEs: All Central Public Sector Enterprises must route MSME payments through the platform, increasing the availability of low-risk, government-backed invoices.
- Credit Guarantee Support via CGTMSE: Credit guarantee coverage is extended for invoice discounting, reducing perceived risk for lenders and encouraging competitive discounting rates.
- Integration with Government e-Marketplace (GeM): Seamless digital data flow between GeM and TReDS will reduce due diligence friction and speed up financing.
- Secondary Market for Receivables: Developing a secondary market through securitisation will allow broader participation from institutional investors.
4. The ‘Corporate Mitras’ Initiative
This initiative introduces a cadre of trained professionals, supported by institutions like ICAI, ICSI, and ICMAI, to assist MSMEs in managing regulatory compliance and documentation, particularly in Tier-II and Tier-III cities. While it improves documentation quality, concerns exist regarding potential unhealthy competition with existing qualified professionals in smaller towns.
5. Self Help Entrepreneurs – SHE Marts
Introduced to promote women-led entrepreneurship in rural and semi-urban areas, these community-owned retail spaces will be developed at the cluster level through Cluster Level Federations (CLFs).
Key Sector-Specific MSME Initiatives
- Textile Sector: Includes the Textile Expansion and Employment Scheme, National Fibre Scheme (for natural fabrics like silk and wool), Tex-Eco Initiative (for "green" products), Samarth 2.0 (skilling), and Mega Textile Parks.
- Chemical Sector: Development of Rare Earth Corridors in Odisha, Kerala, Andhra Pradesh, and Tamil Nadu.
- Agro-Processing Sector: Extension of the PLI Scheme (₹1,200 crore allocation), targeted development for high-value crops (coconut, cashew, cocoa, sandalwood), and a boost to seafood exports by increasing the duty-free import limit for inputs from 1% to 3% of FOB value.
- Tourism and Hospitality: Establishment of Regional Medical Tourism Hubs and promotion of eco-tourism.
- Education and Skilling: Pilot program with IIMs to train 10,000 tourism guides; upgrades to train 1 lakh Allied Health Professionals and 1.5 lakh caregivers.
- Lower Input Costs: Reduction of customs duties on capital goods and inputs for lithium-ion battery and solar-related production.
Tax and Compliance Relief
- Rationalisation of TDS and TCS rates to reduce fund blockage.
- The new Income Tax Act (April 2026) aims to simplify provisions.
- Reduction of the MAT rate from 15% to 14%.
- Simplification of GST compliance by removing the need for justification for raising post-sales credit notes to link with original invoices.
Role of Chartered Accountants and ICAI
Budget 2026 acknowledges the role of professional institutions in building MSME capacity. CAs are viewed as strategic partners in MSME transformation, handling financial discipline, risk controls, and investment readiness beyond mere compliance.
Conclusion
The Budget strengthens MSMEs through growth capital, liquidity reforms, and affordable compliance support. Structured execution of these steps will create a responsive payment ecosystem and improve credit flow for "Champion SMEs".
References
- https://www.nvcfl.co.in/
- https://www.nsc.co.in/
- https://www.sidbi.in/en/
- https://www.indiabudget.gov.in/
The following is the full text of the article titled "India’s Ongoing Battle against Money Laundering and Terrorist Financing", authored by CA. Sonia M. Ketkar, as published in the March 2026 issue of The Chartered Accountant journal:
India’s Ongoing Battle against Money Laundering and Terrorist Financing
CA. Sonia M. Ketkar
Member of the Institute
Introduction
India, the world’s fourth-largest economy and a leader in combating Money Laundering and Terrorist Financing, faces persistent threats from several terror groups. Its rapid economic digitisation, financial inclusions, and growing global financial integration pose evolving challenges in protecting its financial ecosystem from illicit activities. India’s Anti-Money Laundering (AML)/Countering the Financing of Terrorism (CFT) Framework is engineered to adapt to emerging threats and for compliance with International Standards set by FATF. As a member of the Financial Action Task Force (FATF) since 2010 and of the Asia/Pacific Group on Money Laundering (APG) since 1998, India implements the FATF’s 40 Recommendations to combat illicit financial flows.
Understanding Money Laundering, Terrorism Financing, and Anti-Money Laundering
- Money Laundering: A criminal process of making illegally-gained proceeds (known as ‘Dirty Money’) from illicit activities (Drug Trafficking, Corruption, Human Trafficking, Wildlife Trafficking, Tax Evasion, Terrorism Financing, etc.) appear to have come from a legitimate source.
- Terrorist Financing: Channelising funds for terrorist activities, regardless of whether the source is legal or illegal.
- Anti-Money Laundering (AML): A set of policies and practices to ensure that financial institutions and other regulated entities prevent, identify, and report illicit activities.
Key Legislative Pillars Enhancing India’s AML/CFT Framework
The Prevention of Money Laundering Act (PMLA), 2002
The PMLA forms the core of India’s legal framework to combat money laundering. It mandates banks, financial institutions, intermediaries, and people carrying a designated business or profession to verify client identities, maintain records, and furnish information to the Financial Intelligence Unit of India (FIU-IND). The PMLA has been reinforced to adapt to emerging crimes:
- The Act now includes CAs, CSs, and CMAs carrying out financial transactions on behalf of their clients.
- Cryptocurrency and Other Virtual Digital Assets are under its purview.
- Beneficial Ownership threshold reduced to 10% from 25%, expanding accountability.
- Redefinition of Politically Exposed Persons (PEPs) and the inclusion of Religious and Charitable entities under the framework.
- Development of Central KYC and a requirement for reporting entities to retain records for 5 years.
Unlawful Activities (Prevention) Act (UAPA), 1967
This is India’s Anti-Terror Act. The UAPA Amendment Act, 2019 empowered the Union Government to designate individuals as terrorists without a formal judicial process and authorized the DG NIA to seize properties related to terrorism proceeds.
The Armed Forces (Jammu and Kashmir) Special Powers Act, 1990
This provides special powers to the Armed Forces in disturbed areas for anti-terrorism operations. High-level meetings in early 2025 focused on monitoring terror-financing and achieving ‘Zero Terrorism’ in Jammu and Kashmir.
Key Roles and Contributions of India’s Central AML/CFT Authorities
Financial Intelligence Unit-India (FIU-IND)
FIU-IND is the central agency for receiving, processing, and disseminating information regarding suspect financial transactions. It is a central repository for critical intelligence on cash transactions, NPO transactions, and cross-border wire transfers.
Enforcement Directorate (ED)
The ED investigates serious economic offences where proceeds are from crimes like corruption and drug trafficking. Between 2014 and 2024, the ED initiated 5113 PMLA investigations. In FY2024-25, it provisionally attached approximately INR 30,036 Cr in assets (a 141% rise) and secured 34 individual convictions. As of March 2025, the ED maintained a striking 93.6% conviction rate.
National Investigation Agency (NIA)
Established post-26/11, the NIA serves as a central intelligence hub. It has adopted a multi-pronged approach including the National Terror Data Fusion & Analysis Centre (NTDFAC) and specialized divisions for Anti-Cyber Terrorism and Terror Funding. Since its inception, it has achieved a conviction rate of 95.23%.
Regulators and Regulatory Excellence
- Reserve Bank of India (RBI): Determines extensive KYC/AML/CFT norms and signed an MoU with FIU-IND in April 2025 to enhance liaison and intelligence sharing.
- Central Board of Direct Taxes (CBDT): Combats tax evasion using DTAAs and mandates reporting entities to file SFTs (Statement of Financial Transactions).
- Central Board of Indirect Taxes and Customs (CBIC): Acts as the PMLA ‘Regulator’ for dealers in precious metals/stones and real estate agents.
- Securities and Exchange Board of India (SEBI): Regulates markets and launched an AML/CFT Certificate Course for intermediaries.
- Insurance Regulatory and Development Authority of India (IRDAI): Signed an MoU with FIU-IND in January 2025 and requires KYC records to be uploaded to the Central KYC Registry.
- Ministry of Corporate Affairs (MCA): Signed a formal MoU with FIU-IND and lowered beneficial ownership disclosure to 10% to prevent the use of shell companies.
- NABARD: Signed an MoU with FIU-IND in September 2024 to ensure PMLA compliance among regulated entities.
The Financial Action Task Force (FATF) and India’s Progress
The FATF Mutual Evaluation Report (September 2024) applauded India’s technical compliance and effective AML/CFT framework, placing India in the ‘Regular Follow-up’ category alongside the UK, France, and Italy. However, the report noted areas for improvement, including stronger prosecutions for terrorist financiers and cash restrictions on precious metal dealers. India hosted the 2025 FATF Private Sector Collaborative Forum in Mumbai to discuss public-private partnerships.
Technical Advancements to Strengthen the Framework
- Digital KYC: Involves capturing live photos and geolocation (Latitude/Longitude) for secure identity verification.
- FINnet 2.0: An advanced AI-Machine Learning system developed by FIU-IND to generate risk scores and flag high-risk cases via sub-systems like FINGate, FINCore, and FINex.
- Central KYC Records Registry (CKYCR): A centralized repository that reduces redundant data and simplifies the KYC process.
Challenges and Conclusion
Judicial backlogs remain a hurdle; despite 100 special PMLA courts, trials are often delayed because they are linked to the progress of corresponding predicate offences. Investigations are further complicated by the forensic analysis required for complex financial structures.
In conclusion, India is progressing positively through domestic and international alliances, but continuous enhancement is needed. Laws must update to combat methods involving Fintech and Virtual Assets. Improved collaboration between agencies and ongoing technological modernization are essential to securing the financial system and national security.
References
- Annual Report- ED FY 2024-25
- PIB (Finance Ministry) - Capacity Building Programme (22-04-2025)
- PIB (Ministry of Home Affairs) (11-02-2025)
- Master Circular on AML/CFT, IRDAI (29-09-2015)
- PIB (Finance Ministry) - FATF MER (19-09-2025)
- ICAI Article- Financial Intelligence Unit of India Leveraging AI to Combat Money Laundering
- Internal Risk Assessment Guidance Nov/Dec 2024
The following is the full text of the article titled "Financial Market: Cracking the Code of Credit Ratings: Practical Insights for Businesses and CAs", authored by CA. Ritik Joshi, as published in the March 2026 issue of The Chartered Accountant journal:
Cracking the Code of Credit Ratings: Practical Insights for Businesses and CAs
CA. Ritik Joshi
Member of the Institute
Introduction to External Credit Rating
In today’s credit-driven economy, businesses of all sizes require external funding to expand operations, invest in new projects, or manage working capital. A crucial enabler in accessing this capital at favorable terms is a good external credit rating. Assigned by independent credit rating agencies, this rating evaluates a company’s ability to meet its financial obligations. A strong credit rating offers numerous benefits, including access to lower interest rates, increased investor confidence, and enhanced market reputation. Credit rating agencies rely on comprehensive methodologies that include financial performance, business risk, operational efficiency, management quality, and industry outlook.
Chartered Accountants (CAs), with their deep financial and regulatory expertise, play a critical role in preparing businesses for the credit rating process. From preparing robust documentation to guiding strategic improvements and acting as liaisons with agencies, their contribution can significantly impact the final rating outcome. This article explores the fundamentals of external credit rating, methodologies adopted by agencies, how financial ratios play a role, and how CAs can support businesses throughout the journey.
An external credit rating is a formal, independent opinion on a borrower’s creditworthiness, issued by a recognized Credit Rating Agency (CRA). It serves as a vital tool for lenders and investors to assess the risk associated with lending to or investing in a particular company. In India, key agencies include CRISIL, ICRA, CARE Ratings, and India Ratings & Research. Globally, agencies like Moody’s, Standard & Poor’s (S&P), and Fitch are prominent. Credit ratings are typically expressed in letter grades (e.g., AAA, AA, BBB, BB, etc.), where higher grades indicate better creditworthiness. These grades may also include modifiers like “+” or “-” for finer differentiation.
Grades of Credit Ratings and their Types
Credit rating agencies use alphanumeric symbols to assign grades that reflect the creditworthiness of a borrower or financial instrument. These grades are broadly classified into investment grade and speculative (or junk) grade, with separate scales for long-term and short-term instruments.
Long-Term Credit Rating Scale
Used for instruments with a maturity period exceeding one year (e.g., bonds, debentures, term loans). Each category from AA to B may have a “+” (plus) or “–” (minus) to show relative standing within the category.
- AAA: Highest safety; negligible credit risk (Investment Grade)
- AA: High safety; very low credit risk (Investment Grade)
- A: Adequate safety; low credit risk (Investment Grade)
- BBB: Moderate safety; moderate credit risk (Investment Grade)
- BB: Moderate risk of default (Speculative Grade)
- B: High risk of default (Speculative Grade)
- C: Very high risk; near default (Speculative Grade)
- D: Default or expected to default (Default Grade)
Short-Term Credit Rating Scale
Used for instruments with a maturity period of less than one year (e.g., commercial papers, working capital loans).
- A1+: Highest degree of safety (Investment Grade)
- A1: Very strong capacity to meet obligations (Investment Grade)
- A2: Strong capacity; marginally lower safety (Investment Grade)
- A3: Moderate safety (Investment Grade)
- A4: Inadequate safety; high risk (Speculative Grade)
- D: Default (Default Grade)
SME Credit Rating Scale (By Indian Rating Agencies)
Used for Micro, Small & Medium Enterprises (MSMEs) to assess creditworthiness for bank loans and government schemes.
- SME 1: Highest level of creditworthiness
- SME 2: High level of creditworthiness
- SME 3: Good creditworthiness
- SME 4–5: Moderate creditworthiness
- SME 6–8: Weak to poor creditworthiness
Sovereign Credit Rating Scale (For Countries)
Used to assess the ability of a government to repay debt, issued by global agencies like Moody’s, S&P, and Fitch.
Why Credit Ratings Matter in Business Financing
Credit ratings serve as a shorthand for a company’s financial health and repayment capability. Key reasons include:
- Access to Cheaper Credit: Lenders rely heavily on ratings when determining interest rates; higher ratings reduce perceived risk, enabling banks to offer lower rates.
- Improved Loan Sanction Chances: Processes for unrated or poorly rated companies are more stringent, slower, and often come with higher collateral requirements.
- Increased Investor Confidence: Institutional investors often require a minimum credit rating; a strong rating widens the investor base and allows participation in capital markets through bonds or commercial papers.
- Regulatory Compliance: In many cases, regulators and exchanges require ratings for issuing debt instruments or for listing securities.
- Business Reputation and Transparency: Ratings reflect sound financial practices and corporate governance, enhancing brand value and trust with stakeholders.
Methodology Used by Credit Rating Agencies
While each agency has its own proprietary model, methodologies typically include both quantitative and qualitative assessments:
- a) Business Risk Profile: Includes industry risk (cyclicality, growth, regulation), competitive position (market share, pricing power, barriers), and revenue diversity (concentration risk across clients/geographies).
- b) Financial Risk Profile: Evaluates historical and projected financials (revenue, profit margins), leverage (capital structure, debt-equity ratio), and cash flow adequacy for debt servicing.
- c) Operational Efficiency: Examines productivity, fixed asset turnover, and capacity utilization.
- d) Management and Governance: Reviews track record (experience, direction, responsiveness) and governance (Board independence, audit practices, related party transactions).
- e) Legal and Regulatory Environment: Impact of pending litigation, compliance issues, or regulatory action.
- f) Macroeconomic Factors: Considers the overall economy, currency risk, and sector-specific indicators.
- g) Rating Committee Decision: A final rating is reviewed and assigned by a committee of senior analysts and sector experts.
Role of Financial Ratios in Credit Rating
Financial ratios are fundamental to the quantitative part of the credit rating process. Maintaining favorable ratios can greatly improve or sustain a company’s rating.
- Net Profit Margin: Positive and consistent; indicates how much revenue is retained as profit after all expenses.
- Return on Capital Employed (ROCE): Industry-dependent; shows how effectively the company uses capital to generate profits.
- Interest Coverage Ratio (ICR): Above 2.5-3x; shows ability to service interest obligations; higher is safer.
- Debt Service Coverage Ratio (DSCR): Minimum 1.25x; reflects the ability to repay both interest and principal from operational cash flows.
- Free Cash Flow to Firm (FCFF): Should be positive and consistent; indicates availability of internal cash to support operations and investments.
- Operating Cash Flow: Stable and positive vs. net income; measures actual cash generation from core business operations.
Role of Chartered Accountants in Credit Rating Process
Chartered Accountants bring strategic, analytical, and compliance expertise to businesses undergoing the process:
- Step 1: Pre-Rating Preparation: Financial health analysis, simulating rating outcomes, and identifying weaknesses.
- Step 2: Documentation & Reporting: Preparing audited financial statements, business plans, projections, project reports, and internal control documentation.
- Step 3: Ratio Optimization & Advice: Restructuring debt to improve leverage, working capital efficiency, and margin/cost structure enhancements.
- Step 4: Liaison with Agencies: Analyst meetings, handling queries, and providing clarifications.
- Step 5: Post-Rating Monitoring: Ongoing compliance monitoring, addressing triggers for downgrades, and readiness for periodic reviews.
Regulatory and Market Trends
- SEBI & RBI Regulations: Mandate credit ratings for certain instruments like commercial papers, NCDs, and structured obligations.
- MSME Focus: Various government schemes offer interest subsidies for MSMEs with external ratings.
- ESG Considerations: Many rating agencies now include Environmental, Social, and Governance metrics in their frameworks.
- Technology and Data Analytics: CRAs are increasingly adopting AI tools and automated financial monitoring.
Tips & Tricks for a Company to Achieve an Investment Grade Credit Rating
Achieving an investment grade rating (AAA to BBB-/Baa3) is a strategic goal that significantly reduces costs and improves reputation.
- Strengthen Financial Ratios:
- Leverage Ratios: Keep D/E ratio low; reduce external liabilities (TOL/TNW); use retained earnings for expansion instead of debt; repay high-cost loans early.
- Liquidity Ratios: Maintain Current Ratio above 1.33 and Quick Ratio above 1.0; monitor inventory and receivable cycles.
- Profitability Ratios: Improve EBITDA and Net Profit Margins; invest in automation and product differentiation; avoid frequent one-time losses.
- Coverage Ratios: Ensure Interest Coverage Ratio (ICR > 2.5x) and DSCR > 1.5x; restructure existing loans for longer terms if necessary.
- Establish Robust Internal Controls and Governance: Form an active Board with independent directors; implement ERP or MIS systems for real-time data; follow transparent accounting standards and use reputed audit firms; document risk management policies.
- Improve Cash Flow Visibility: Enter into long-term contracts; reduce revenue volatility by diversifying products or geographies; maintain consistent operating cash flows.
- Maintain Clean Credit & Compliance Track Record: Avoid defaulting on statutory dues (GST, PF, TDS); ensure timely loan repayments (even minor delays hurt); file all returns regularly.
- Prepare a Strong Business Plan with Future Outlook: Create a clear plan with revenue forecasts, funding structures, and competitive advantages; include SWOT analysis and stress testing.
- Optimize Capital Structure: Keep equity levels strong relative to debt; convert debt into equity or quasi-equity (like CCDs); use less risky funding instruments like ECBs.
- Maintain Industry Benchmarks and Peer Comparisons: Track and match industry-average ratios; benchmark costs and debt levels.
- Avoid Red Flags: Do not frequently restructure debt, rely on undocumented promoter loans, delay publishment of audited results, or pursue aggressive expansion without cash flow backing.
Crux: Achieving an investment-grade rating is about sound business practices, transparency, financial discipline, and strategic clarity. With consistent efforts and professional guidance, companies of all sizes, including MSMEs, can earn a favorable rating that unlocks better funding and growth opportunities.
Conclusion and Way Forward
External credit ratings are more than just a regulatory checkbox—they are a reflection of a company’s financial health, transparency, and future potential. For growing businesses, especially MSMEs, obtaining and maintaining a favorable credit rating can unlock significant financial advantages.
Chartered Accountants, as trusted financial advisors, can guide the credit rating process from start to finish. Their role is vital not only in helping businesses secure funding but also in establishing long-term financial discipline. As rating methodologies evolve and become more sophisticated, businesses that invest in strong financial practices, compliance, and transparency—with expert support—will be best positioned to benefit.
References
- SEBI (Credit Rating Agencies) Regulations, 1999
- RBI credit risk guidelines and Basel norms
- MSME schemes: CGTMSE, SIDBI programs, Interest Subvention
- Rating methodologies from Indian agencies: CRISIL, ICRA, CARE, India Ratings
- Global frameworks: Moody’s, S&P, Fitch Ratings
- Ratio analysis: liquidity, leverage, profitability, coverage
- Best practices: financial structuring, internal controls, corporate governance
- Role of Chartered Accountants as rating advisors
- Practical insights from real-world consulting, audit, and financial management
The following is the full text of the article "RBI Investment Directions: The New Playbook for Treasury and Audit", authored by CA. (Dr.) Yogesh Satpute, as published in the March 2026 issue of The Chartered Accountant journal:
RBI Investment Directions: The New Playbook for Treasury and Audit
CA. (Dr.) Yogesh Satpute
Member of the Institute
RBI’s investment framework for banks has shifted from a rule-heavy classification and caps approach to a principles & governance-driven, risk-aligned architecture synced with Basel III and Accounting Standards. The trajectory across 2021, 2023, and 2025 Directions shows a clear pivot from mechanical limits and asymmetric valuation to SPPI-based classification, symmetric fair value treatment, and Board-anchored accountability. The 2025 Directions, specifically the Reserve Bank of India (Commercial Banks – Classification, Valuation, and Operation of Investment Portfolio) Directions, 2025 dated November 28, 2025, consolidate prior reforms and embed governance, valuation rigor, liquidity treatment, and prudential filters into a unified operating code for treasury portfolios.
From Caps to Intent Based Governance
The earlier regime had a 25% HTM (Held to Maturity) cap with asymmetric accounting where mark-to-market losses hit P&L (profit and loss) immediately while gains were constrained. The 2023 revamp removed the HTM cap, introduced the SPPI (Solely Payments of Principal and Interest) test, and made fair value changes symmetric across AFS (Available for Sale) and FVTPL (Fair Value Through P&L). Additionally, the holding period norm for HFT instruments was eased. The new directives hardcode governance through a standalone Board chapter and embedded FAQs clarifying LCR (Liquidity Coverage Ratio) monetisation, NPI (Non-Performing Investments) segregation, and non-SLR controls. Audit focus correspondingly shifts from mere numerical threshold/defeasance checks to documented acquisition intent, behavioural consistency, accounting, reporting, and governance evidence. (Chapter II Para 6–14; Chapter IV Para 33–41).
Board Oversight: Non-Delegable Core (Chapter II Para 6–14)
There must be a Board-approved detailed Investment Policy covering objectives for own and client/constituent books, eligible instruments and derivatives, sanction authorities, exposure ceilings (issuer, PSU/corporate, private placement), valuation frameworks, broker policies, and limit and risk systems.
- An Investment Committee is mandatory for equity, preference, convertibles, and equity-like exposures.
- Boards must define impairment thresholds for subsidiaries, associates, and JVs, which sit outside HTM/AFS/FVTPL buckets.
- Banks shall not reclassify investments between categories; any reclassification requires pre-approval from the Board and RBI, creating a hard bar against category switching.
- A Board-approved HTM sale policy must specify permitted exits (e.g., credit deterioration, buybacks, or OMO participation) without invalidating HTM intent.
- Non-SLR investments require Board-ensured risk systems and quarterly reviews of credit quality and compliance with the 10% unlisted cap.
- Broker concentration breaches must be reported post-facto to the Board.
- A half-yearly portfolio review (as of March 31 and September 30) must reach the Board by end-May and end-November.
Audit work must inspect Board and Committee minutes, policy, and evidence of challenge as best audit practice.
Classification: SPPI and Business Model Tests (Chapter IV Para 33–41)
All investments (excluding subsidiaries, associates, JVs) must be classified at or before acquisition into HTM, AFS, or FVTPL, with HFT (Held for Trading) as a sub-category within FVTPL. An instrument is SPPI compliant when its contractual cash flows represent only payments of principal and interest, restricted to basic lending components (time value of money, credit risk, and a normal lending margin) without equity-type returns or conversion features.
Classification is objective-driven, not instrument-type driven. Identical ISINs bought in the same lot can be placed in different buckets if documented acquisition intent differs. SLR status does not determine classification; instruments failing SPPI must go to FVTPL.
- HTM Eligibility: Requires intent to hold till maturity and SPPI compliant cash flows.
- Automatic SPPI Failures: Barred from HTM/AFS are convertibles, Basel III AT1/Tier 2 loss-absorbent bonds, and equity/preference shares (unless an irrevocable AFS equity election is made).
- AFS Classification: Requires dual intent (collect cash flows and sell the paper) plus SPPI compliance.
- FVTPL: The residual class for Non-SPPIs, equities (unless AFS elected), mutual funds, AIFs, REITs, and index-linked bonds.
Investments in subsidiaries, associates, and joint ventures are held sui generis outside the standard classification framework and are subject to specified impairment and Board-level monitoring.
Liquidity and LCR: HTM Guardrails (Chapter IV Para 35 & 38 FAQs)
HQLA (High Quality Liquid Assets) held for LCR can stay in HTM if not routinely sold. Repo usage is not inconsistent with HTM. However, if anticipated sales for LCR monetisation exceed 5% of opening HTM carrying value, those securities cannot be in HTM. Audit testing must validate SPPI assessments, reconcile LCR holdings with HTM tagging, and challenge borderline instruments like structured notes.
Valuation: Fair Value Hierarchy Discipline (Chapter IX Para 73–87)
Valuation follows a three-level hierarchy based on input observability:
- Level 1: Unadjusted quoted prices in active markets (e.g., FBIL / NDS-OM).
- Level 2: Observable inputs other than direct quotes (yield curves, matrix pricing).
- Level 3: Unobservable inputs (DCF assumptions, model-based valuations) for unquoted non-SLR or distressed debt.
RBI enforces capital conservatism for Level 3: net unrealised gains must be fully deducted from CET1 capital and are unavailable for distribution. Day-1 gains are deferred, while Day-1 losses are recognised immediately. For derivatives, unrealised Level 3 gains are also deducted from CET1.
- HTM: Carried at amortised cost, not MTM.
- AFS: Fair-valued quarterly; unrealised gains/losses are parked in AFS-Reserve rather than P&L.
- FVTPL: Fair-valued through P&L; all gains/losses hit earnings.
Operational Controls: Non-SLR and Dealing Framework (Chapter X Para 88–94)
Government securities must be in demat form. Non-SLR investments have tighter filters: unlisted exposure is capped at 10% of the non-SLR portfolio. Zero-coupon bonds are prohibited (with sinking fund exceptions), and banks must perform internal credit analysis rather than relying solely on external ratings. Internal control architecture must enforce segregation between front, mid, and back offices, with audit trails across operations.
Prudential Treatment: Income, NPI, IFR (Chapter XI Para 95–108)
Investments become NPI (Non-Performing Investments) when overdue more than 90 days. NPIs must be segregated, valued instrument-wise with haircuts, and gains cannot be offset against NPI losses. Issuer-level stress linkage applies: if a borrower’s loan exposure is NPA, their securities are treated as NPI, and vice-versa. Provisioning must be the higher of IRA CP norms or depreciation at NPI recognition. Banks must maintain an Investment Fluctuation Reserve (IFR) of at least 2% of the AFS + FVTPL portfolios.
Conclusion
Returns come from yield curves and spreads, but survival comes from SPPI logic, classification, and Board outcomes. Trade smart, classify smarter, document smartest—that’s the new carry trade. Strong treasury books are built in policy rooms before they show up on trading screens. While duration risk is evident, governance risk is invisible, and RBI’s detailed framework prices in both.
The following is the full text of the article titled Audit Trail - Requirements & Responsibilities, authored by CA. Kypa Gowtham Sai Krishna, as published in the March 2026 issue of The Chartered Accountant journal:
Audit Trail - Requirements & Responsibilities
CA. Kypa Gowtham Sai Krishna
Member of the Institute
“Audit Trail/Edit log” is the new buzzword that draws the attention of the management from a compliance perspective and of the auditors from reporting perspectives. These requirements emanate from the rules issued by the Ministry of Corporate Affairs under the Companies Act, 2013. This article is an attempt to break down the legal requirements and responsibilities from the perspective of management and the auditor.
Audit Trail
It is a chronological record of the changes that have been made to the data that captures any change to a record, including:
- who made the change
- when it was made
- what fields were changed
Simply, any change to data, including creating new data, updating, or deleting data, must be recorded.
Management Perspective
Statutory Requirement
Proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 requires that for the financial year commencing on or after the 1st day of April 2023, every company that uses an accounting software for maintaining its books of account, shall use only such accounting software which has a feature of:
- recording an audit trail of each and every transaction,
- creating an edit log of each change made in the books of account, along with the date when such changes were made, and
- ensuring that the audit trail cannot be disabled.
Applicability
Every company (OPC/Section 8/Private/Public/foreign company) that uses an accounting software shall use such accounting software that has the capabilities to comply with the requirements of Rule 3 of the Companies (Accounts) Rules, 2014.
The said rule is applicable only in case of accounting data maintained with the aid of an accounting software. Working records maintained electronically but not through an accounting software (e.g., fixed asset register or paysheets in Excel) do not require an audit trail, although the resulting entries passed in the accounting software are under the purview.
The functionality is only applicable for the “books of accounts” as defined in Section 2(13) of the Act. It is not applicable to “books and papers” as defined in Section 2(12), such as deeds, writings, or minutes maintained on paper or electronically. Furthermore, the audit trail functionality is required even if the software does not allow modifications subsequent to entry posting.
Management’s Responsibility
The responsibility of the management includes:
- Determining the Books of Accounts: Management must determine which books are maintained in accounting software. Only changes made to these books of accounts require an audit trail. For instance, adding/deleting a user or changes to ESG data are changes to the software but not to the books of accounts. Section 2(13) defines books of accounts as records for: (i) sums of money received/expended; (ii) sales and purchases of goods/services; (iii) assets and liabilities; and (iv) prescribed cost items.
- Selection of Accounting Software: The selected software must provide an audit trail for all transactions and record: (1) change made (creation, modification, deletion); (2) time stamp; (3) user ID; and (4) transaction reference. The software should also be able to generate a report of said trail. This requirement applies whether the software is maintained in-house or outsourced to a third-party provider.
- Retention: The audit trail forms part of the books of accounts and must be retained for at least eight financial years preceding a financial year, or longer if prescribed during an investigation.
- Non-Compliance: According to Section 128(6), non-compliance may lead to a fine between ₹50,000 and ₹5,00,000.
Challenges
Major challenges include:
- Cost of storage for building huge data repositories.
- Time invested in structuring reports and potential hits to run-time efficiencies.
- Maintaining effective and efficient controls.
- The additional burden of daily backups.
Auditor Perspective
Statutory Requirement
Section 143(3)(j) of the Companies Act, 2013, read with Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014, requires auditors to report whether:
- the accounting software has an audit trail (edit log) feature,
- it has operated throughout the year,
- it covers all transactions,
- it has not been tampered with, and
- it has been preserved according to retention requirements.
Reporting under Rule 11(g) was deferred to the financial year commencing on or after April 01, 2023.
Applicability
This is applicable to all classes of companies maintaining books of accounts specified in Section 128 with software for financial years starting April 01, 2023. It applies to both standalone and consolidated financial statements. However, it is not applicable for components incorporated under other statutes (LLPs, firms) or entities incorporated outside India with no similar reporting obligation. The rule only applies to audit reports issued under the Companies Act where the “Report on other legal and regulatory requirements” is included.
Audit Procedures
Auditors need to:
- Understand the books of accounts, assessment of software used, and whether functions are in-house or outsourced.
- Identify risks (e.g., audit trail being disabled, unauthorized access, failure to cover the total period, or database-level changes) and controls.
- Plan responses through control and substantive testing.
Use of Experts
Auditors may involve IT experts to gain reasonable assurance regarding the software’s features, operation, and retention. Experts specialized in auditing fall under SA 220, while those specialized only in IT fall under SA 620. The auditor retains sole responsibility for the audit opinion.
Materiality
As this is a factual reporting requirement for every single transaction, the materiality threshold is not applicable.
Controls & Substantive Testing Plans
Testing methods include:
- Evaluating controls preventing unauthorized access or modifications.
- Inquiring with system administrators about ERP customizations.
- Testing transactions for operating effectiveness throughout the year.
- Checking configuration settings to ensure the trail cannot be disabled.
- Testing in a test environment rather than real environments.
- Verifying database edit logs for direct modifications to raw data.
Service Organisation
If accounting is outsourced, audit trail requirements extend to the third party’s accounting software. Auditors may use independent reports on service organizations (e.g., SOC 1/SOC 2/SAE 3402) in compliance with SA 402 or SAE 3402.
Documentation and Reporting
Documentation should include the understanding obtained, procedures performed, conclusions, and expert consultations. Auditors' views must be reported under the “Report on other legal and regulatory requirements” section. Modifications to Rule 11(g) reporting may impact reporting under Section 143(3)(b) (proper books of accounts), Section 143(3)(h) (maintenance of accounts), and Section 143(3)(i) (Internal Financial Controls).
Conclusion
The new requirements do not prevent management from deleting or modifying books of accounts; rather, they require a log of all such changes to enable management, auditors, or regulators to identify anomalies that may lead to material misstatements or irregularities.
The following is the full text of the article titled "Accounting treatment of non-construction fee under Ind AS framework", as published in the March 2026 issue of The Chartered Accountant journal under the Expert Advisory Committee (EAC) section:
Accounting treatment of non-construction fee under Ind AS framework.
A. Facts of the Case
1. A company (hereinafter referred to as ‘the Company’) is a company limited by shares, domiciled in India and was incorporated in June 1964 under the erstwhile Companies Act, 1956 as the steel plant construction arm of the Government of India (GoI). Pursuant to a financial restructuring in April 2017 and subsequent acquisition of 51% of its equity shares by N Limited, the Company became a subsidiary of N Limited and came under the administrative control of the Ministry of Housing and Urban Affairs. The Company is an unlisted company and has been conferred the coveted Mini-Ratna Category-I status in the year 2022.
2. Indian Accounting Standards (Ind AS) became applicable to the Company with effect from 1st April 2017. Accordingly, the financial statements for the financial year (F.Y.) 2017-18 were prepared in compliance with Ind AS, along with comparative figures for the F.Y. 2016-17 and the opening balance sheet as at 1st April 2016.
3. The Company was allotted a plot of land measuring 4,841.66 square yards in Mohali, Punjab by the Greater Mohali Area Development Authority (GMADA) on 22nd February 2011 for the purpose of constructing an office building complex. The land was purchased for a consideration of Rs. 12,10,41,500/-.
4. The Conveyance Deed was entered into between the GMADA and the Company on 13.03.2015. As per the Conveyance Deed, construction of the office complex was to be completed within a period of 3 years from the date of possession of land but due to financial crunch, the construction could not be carried out. Moreover, as the proposal for restructuring of the Company was pending with GoI, the Company could not proceed with capital commitment till the time the Company being taken over by N Limited in the year 2017 and thus, the process for construction was delayed. Finally, after being taken over by N Limited, the process for construction of plot was started in the F.Y. 2018-19, but unfortunately due to Covid-19 pandemic, the work could not be taken up.
5. Subsequently, as instructed by GMADA vide letter dated 30.08.2023, the Company paid an amount of Rs. 2,53,700/- towards proof checking and structural vetting of drawings to ‘T Institute of Engineering and Technology’ during June, 2024.
6. Further, the Company has also paid Rs. 22,02,741/- towards obtaining building permission as per demand raised by State Urban Development Authority during January 2025. As on date, building permission, approval of drawings, etc. are still awaited from GMADA, Government of Punjab.
Accounting Treatment of Non-Construction Fees of GMADA
7. Initial Construction/ Possession Charges during the year 2014:
Extracts of Clause 4 of the Conveyance Deed entered into between the Company and GMADA are mentioned as under:
“(4) The Transferees shall within three years from the date of issue of allotment order namely Order Dated: 22/02/2011 complete the construction of Office purpose on the said site... Provided that the time under this clause may be extended by the Estate officer in case the failure to complete the building by the stipulated date was due to reasons beyond the control of the Transferees.”
Based on the date of allotment order, the stipulated construction period expired on 21.02.2014. Accordingly, GMADA considered the period of delay from 22.02.2014 to 31.12.2014 (313 days) and had levied charges at 2% of the consideration amount, amounting to Rs. 20.76 lakh as construction/ possession charges. This amount was duly paid by the Company on 10.10.2014.
Accounting Treatment made during 2014:
- Land (A/c head: Property, Plant and Equipment) Dr Rs. 20.76 lakh
- Bank A/c Cr Rs. 20.76 lakh
8. Subsequent Demand of Construction Extension Fees by GMADA during the year 2021:
GMADA, vide its letter dated 02.03.2021, demanded an amount of Rs. 300.68 lakh (inclusive of GST of Rs. 45.87 lakh), as Construction Extension Fees up to 30.06.2021. In accordance with the above demand letter, the Company started making necessary provisions in its books under Capital Work-in-Progress (CWIP) for the Non-Construction Fees on quarterly/ annual basis, by self-calculating the fees for each year up to 31.03.2024.
9. Observations of C&AG during F.Y. 2022-23:
C&AG raised a query noting that the amount of Rs. 20.76 lakh paid for construction extension fees should have been included in Capital Work-in-Progress (CWIP) instead of Land under Property, Plant & Equipment as the cost was directly attributable to the asset on the location which is yet to be put to use, per Ind AS 16.
10. Pursuant to the audit observations, the Company rectified the treatment by debiting CWIP and crediting Land for Rs. 20.76 lakh.
11. Subsequent Demand of Construction Extension Fees by GMADA during the year 2025:
GMADA, vide letter dated 1st February 2025, demanded Non-Construction Fee of Rs. 409.57 lakh (inclusive of GST and Penal Interest). This included Rs. 73.20 lakh as Penalty upto December 2024, which was earlier booked under CWIP and subsequently charged to the Profit and Loss Account as Penalty during F.Y. 2024-25. Further, Penal Interest of Rs. 6.78 lakh for Jan–March 2025 was also charged to P&L. As on 31.03.2025, the CWIP balance relating to GMADA was Rs. 363.65 lakh.
12. Summary of Entries passed in the Company’s books from F.Y. 2022-23 to F.Y. 2024-25:
- FY 2022-23: Provisioned Rs. 321.74 lakh to CWIP.
- FY 2023-24: Transferred Rs. 20.76 lakh from Land to CWIP; provisioned an additional Rs. 56.07 lakh to CWIP.
- FY 2024-25: Provisioned Rs. 41.01 lakh to CWIP; transferred Rs. 73.20 lakh (penalty portion) from CWIP to P&L; reversed excess CWIP of Rs. 28.55 lakh.
13. Observations of C&AG on Books of Account of F.Y. 2024-25:
C&AG argued that as the Company failed to complete construction within the stipulated timeline, the extension fee is a penalty and not a condition necessary for operating the asset. Per Para 16 (b) of Ind AS 16, it should have been charged off as an expenditure; inclusion under CWIP resulted in overstatement of profit and CWIP.
14. The Company’s Response to the C&AG Observations of 2024-25:
The Company disagreed, stating that the Conveyance Deed does not mention a penalty and that the fee is within the legal framework of the Government of Punjab's extension policy. They argued that only the penal interest component was treated as a penalty. Furthermore, under a 2025 Amnesty Policy, the quantum was reduced to Rs. 249.27 lakh, which the Company paid in September 2025.
B. Query
15. In view of the above facts and considering the relevant provisions of applicable Indian Accounting Standards, the querist has sought the opinion of the Expert Advisory Committee as to whether the existing accounting treatment adopted by the Company for ‘Non-Construction Fees’ paid and payable, debited to ‘Capital Work-in-Progress’ till date is in compliance with the applicable Ind AS, or any modification is warranted.
C. Points considered by the Committee
16. The Committee notes that the basic issue relates to the accounting treatment of non-construction or extension fee. The opinion is expressed purely from an accounting perspective and uses the term ‘non-construction fee’ for convenience.
17. The Committee notes that GMADA levied non-construction fees because the Company could not initiate or complete construction activity within the stipulated three-year timeline.
18. Per Ind AS 16, ‘Property, Plant and Equipment’, the cost of an item comprises purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating as intended. Examples of directly attributable costs include site preparation, installation, and professional fees.
The Committee is of the view that the non-construction fee relates to delay in construction or non-compliance with initial conditions. Such expenditure is not necessary for construction activity but is a cost of holding the land without construction, similar to administration costs. Therefore, it cannot be considered directly attributable under Ind AS 16 and cannot be capitalised; it should be expensed to the statement of profit and loss with appropriate disclosures.
D. Opinion
19. On the basis of the above, the Committee is of the opinion that the non-construction fee relates to delay in construction or non-compliance with the initial condition of construction within stipulated time lines and therefore, it cannot be considered as cost directly attributable to bringing the land or building to the location and condition necessary for it to be capable of operating per Ind AS 16. Accordingly, such expenditure cannot be capitalised and should be expensed by way of charge to the statement of profit and loss with appropriate disclosures.
Administrative Notes:
- The Opinion is only that of the EAC and does not necessarily represent the Opinion of the Council.
- The Committee finalised the Opinion on 14th November, 2025.
