A presentation focused on Indirect Tax Risk Management. How to implement an effective Tax Risk Management system across tax processes in an enterprise. The focus being on preventing risks from materializing.

1. www.taxquotient.com
Indirect Tax Risk Management
An effective Enterprise Tax Risk Management (TRM)
13th October, 2015
Anthony Fernandes
Founder
Tax Quotient

2. Tax Risks
Tax risks are potential
outcomes that arise from
activities or events which
could lead to tax
adversities throughout the
life of an enterprise.
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3. Tax Risks – The Indian Context
• Tax Risks are currently one of the most significant risks faced
by businesses and they are not “insurable”. Biggest business
risks – Lloyd’s survey 2013
• The Indian tax system, particularly the indirect tax system is
still evolving.
• There are 3 levels of indirect taxes, some over-lapping. The
tax system is complex, dynamic and overseen by an
aggressive tax administration. All these factors creates scope
for tax risks/difficulties.
• So how does one recognize the risks, assess and mitigate
them?
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4. Tax Risks & Tax Opportunities
The nature of the
activity determines the
type of risks involved
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The key therefore is to
understand the activity
and risks involved.

5. Litigation
Govt. Audits,
Investigations &
Notices
These activities are
misunderstood as merely
routine tasks. Bur are the
breeding ground for tax
disputes. This is where most
operations related risks emerge
which are usually invisible &
unvisited by Sr Mgmt
PREVENTRESOLVE
Only at this the risk begins
to get management
attention. In most orgs
even this is left to the Tax
Function
Litigation may go right up to
Supreme Court involving
high stakes uncertainties
and may include
prosecution.
How Tax Risks Emerge, Escalate & finally get
noticed
Operations
Business processes, SOPs, IT systems, Accounts,
documentation, declarations, returns, tax payments, internal
reviews & audits, outsourcing, agents etc.
Monitoring, Reviewing,
Assessing & Creating Awareness

6. Tax Legislations
& Frequent
legislative Changes
Transactions
& changes in
Policies
Tax Infrastructure
& Tax Accounting
and Compliance
Processes
Tax Assessments,
Tax Audits
Investigations
Tax Risks
Ability to identify tax risks across the spectrum
of business activities

7. Tax Risk Management (TRM)
• TRM is NOT about becoming RISK AVERSE. Its about :
– Risk awareness. Its not about avoiding all risks nor about grabbing every tax
opportunity blindly.
– Its about creating a risk conscious infrastructure with continuous risk
identification, assessment and mitigation
– Its about placing the right systems, processes & procedures in place to rein-
in risks within acceptable levels
– Its about being proactive. Preventing not resolving risks after they emerge
– Opportunity to consciously calibrate risks to match with risk appetite of an
enterprise.
– Avoiding all surprises! A known tax risk will never surprise!
• Not leaving it to chance! No surprises! Surprises are usually caused by
“flawed” behaviour.
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8. BLIPS – Context & Contributory factors for tax
risks
• Behaviour – Risk appetite, attitude, conduct, focus,
documentation and priorities
• Legislations – The operations an enterprise is engaged with
determines the tax laws applicable
• Infrastructure for tax – Internal & External including CHA
legal counsels, tax authorities and communication channels
• Policy – companies policies on risks, disclosures and risk
mitigation
• Systems including IT systems for compliance
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9. An ideal tax risk management system will work in tax
areas like the autonomous or involuntary nervous
system in a human body. A system which controls vital
life functions continuously, very silently without any
fuss.
The idea is to institutionalize it. Make it involuntary!
An Ideal Tax Risk Management
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10. Types of Tax Risks
Transactional Risk
Operational Risk
Compliance Risk
Financial Risk
Reputational Risk
Litigation Risk
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11. Types of Controls
Tax Control
Environment
Risk Assessment &
Mitigation
Standard Operating
Procedures
Financial Reports
Periodical monitoring
& Review
Review by Board &
Audit Committee
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12. Changes in Law Some are historical
Introduction of VAT in 2005
Negative list based service tax from July 2012
Budget changes – This is an annual exercise
EXIM Policy changes – 5 years (Policy Annual Supplement)
Introduction of GST expected sometime in 2016?
Information Importance of information sharing with Tax
Audits Dealing with audit & investigation.
Sharing information
Declarations Risks related to misdeclaration, suppression of facts can lead
to deadly consequences
Examples of Risks from Operations - Generic
issues
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13. Tax Engine
Procedures – New products/ services/ transactions
ERP/IT systems (erroneous changes in master data can lead to
disastrous consequences)
Who has to be informed about changes
Paying “right tax” and at the “right time”
Returns, declrns,
assessments
Filing correct returns
Making declarations (Employees, CHA)
Valuation – Related person
Import from related party. Global Purchase agreement
Sale of finished goods to related party
Set out Accountabilities
Examples of Risks from Operations – Generic
Issues
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14. Disclosures & Risk
Assessment
Periodical review of pending tax proceedings at all levels,
including on-going audits and assessments. Classify into High,
Medium, Low and Frivolous items
Periodic Disclosures, Assertions and Provisioning to ensure
adequate disclosure of tax risks to stakeholders.
Mitigating risks
Ensuring right defense at all stages
All facts to be brought out at the first stage of adjudication
itself. Legal arguments can be introduced later also.
Provisional assessment can be a long term risk. it normally
continues for more than 5 years.
Examples of Operational Risks - Litigation
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15. Unusual or one-off transactions create the greatest risks!
Setting up a new plant
Mergers & Acquisitions
Sale or purchase of assets
Entering into JV (consortium) to execute a contract
Starting a new product or service line
Sale & purchase OR “job-work”?
Sale or licensing of intellectual property
Examples of Risks Emerging from Transactions
This is only illustrative & not an exhaustive list of likely issues

16. Customs duty
Capital goods
Imported capital goods. Eligible for Project Import and EPCG?
Which is better?
Pre & Post import conditions under Project Imports and EPCG.
Registering the contract for Project Import before actual import.
Valuation – know how/ technology, warranty, on-site services
for erection, commissioning etc. whether includible.
Agreements to be vetted for compliance
EXIM License for import (purchase from market)
Inputs
Advance Authorization or DFIA under EXIM
New FTP - EXIM Schemes : MEIS & SEIS - Transfer of license
possible
Examples of Risks from Transactions - Setting up
a new plant
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17. Service Tax
Imported services
Vet contracts to ensure clarity on tax liability including
future tax liabilities
Compliance with reverse charge liability. Not only the
liability but also the “point of taxation” (when)
Ex. duty, sales tax & CST
Local purchase - capital goods Cenvat credit on ‘capital goods’ before registration
Local purchase - inputs &
services
Whether Cenvat and VAT credit available?
C forms and E1 sale in intra-State purchases
Finished product Various Union & State exemptions
Examples of Risks from Transactions - Review
before setting up a new plant
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18. “Slump sale”
Conditions. A business undertaking sold as a “going
concern”. When its not a “slump sale”? Srei Infra (Del HC)
& Bharat Bijilee (Bom HC)
Sale of assets &
liabilities
Sales tax liability. Scope for overlap between service tax &
sales tax (lease) on the IPR.
Cenvat Credit
Cenvat credit balance. Liability on removal of inputs, CG
whether reversed
Project Import Project Import obligations
EXIM obligations EPCG and other authorizations ? Checks before transfer ?
Pending Litigation
Evaluating tax risks in pending litigation (incl notices) at all
levels
Examples of Risks from Transactions – M&A
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19. Customs Hse Agt Background check, interview & clear ground rules.
Incorrect declaration by CHA can get goods seized. Create
financial and delay your project.
CHA’s are vulnerable. Can be pressured by Customs authorities.
Use of ICE code
Don’t allow use of company IEC code other than for company
purposes. Employees, etc.
Private Jetty
Private jetty. Wrong goods or number of packages are removed
without verifying.
Samples
Goods to be sampled for testing. Special attention needed to
ensure declarations are correct. Preserving samples drawn
Provisional
assessment
It is common to start provisional assessment but it normally
continues for not less than 5 years.
Examples of Operational Risks - Customs
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20. Import of bulk
liquids
Quantity imported of liquids, the ullage quantity, the
shore tank quantity, what should be the value
Valuation
Related person. SVB Valuation.
Claim for deduction from post removal expenses from
the price
Valuation– “know how”/technology, warranty, on-site
services for erection, commissioning etc. Agreements
to be vetted for compliance
Inputs
Advance Authorization or DFIA under EXIM
New FTP - EXIM Schemes : MEIS & SEIS - Transfer of
license possible
Examples of Operational Risks - Customs
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21. Summons and Searches
Direction of the investigation is moving
Stay calm but alert. Keep personal bias out. Keep an open mind, ears and eyes
Check if other companies also face a similar situation
Stay to the point. Don’t volunteer information. Don’t say or sign anything you don’t know.
Its okay to appear ignorant.
Be extremely polite, but don’t agree with something just to be polite.
Investigating officers sometimes summon Directors of Companies for routine information or
facts. Mainly to test and apply pressure. One should appear and state the facts.
Pressure on Senior Management usually to compel immediate deposits before completing
investigation / adjudication.
Don’t take a summons lightly. Summons and notices should be escalated to Senior
Management
Operational Risks - Investigations
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22. Tax risk management is a combination of strategy and processes
adopted by the Company Board and Management to :
• set up infrasturcture, systems, processes to create risk
consciousness
• continuously identify,
• continuously assess, and
• continuously mitigate tax risks
to ensure tax risks are within acceptable risk appetite. Also to provide
periodical assurance that this objective is being achieved.
In short this will be a "Tax Control Framework"
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Summarizing - TRM

23. Disclosure
• Duty to disclose – applications, declarations
• Mistake Vs. Misdeclaration and willful suppression,
• Intention – extended time limit, penalty and personal
penalties
Due diligence
• Involve tax staff in planning stage and when
implementing changes
• Formal risk assessment process and sign off
• Opinion from expert/ Senior Counsel
• Comply and pay all legitimate taxes
Responsiveness
• Be alert to pick signals that things are not ok.
• Watch out for queries, audit objections etc. and do
your due diligence
• Quick responses to queries silence suspicions
Summarizing - Tax Risk Management
Review • Conduct regular reviews to rectify gaps proactively
• Watchfulness about changes in law, processes etc.
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24. 24
Searches (Raids) & Seizure
Summons
Summarizing - Managing Tax Emergencies
• Prompt attention and action
• Analyze the facts and information fully before
parting. Find root cause
• Response to the point – don’t volunteer information
unless sure. “Don’t know” is good response
• Is it a “industry” issue or only your Company
• Handle with extremecare and caution.
• Be polite, circumspect and gather as much info on
exact cause of raid?
• Whether this is an industry wide issue?
• Don’t volunteer information check with tax
executive
• Immediately informall senior executives
• Ensure written receipt for all goods and records
seized
24
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