Compliances are EITHER of laws of land where the organisation is operating from OR of directions given by the customer. The latter verifies itself or appoints third party verifier / auditor to carry out certain checking before customer will accept the goods of organisation.

Government (Central / State) of any country implements certain laws to be complied by the organisations operating from that country. The laws can be for the purpose of revenue collection or corporate governance or environment related or social welfare, etc.

Types of laws

Laws cover virtually each and every activity of any organisation. Laws can broadly be categorised under:

    • Statutory compliances
        • Direct tax compliances (to be borne by the organisation) like Income-tax, Customs, etc.
        • Indirect tax compliances (to be collected from customers) like VAT, Excise, Service Tax, Entertainment Tax, etc.
        • Manpower related [Provident Fund (PF), Employee State Insurance (ESI), Factories Act, Welfare Acts, etc.)
        • State Laws (Property, Stamp duty, etc.)
        • Foreign Exchange (RBI)
        • Capital Market (SEBI, Capital Market Laws)
        • Intellectual Property;
        • Others (Companies Act, Competition Law, Consumer Laws, International Laws, etc.)
    • Non-statutory compliances relating to quality of product enforced by customers     

Structure of Law

Any law / statute determine liability, its incidence and timing alongwith certain procedures for discharge of liabilities, disclosures, etc.

Normally, it has following structure:

      • Act (broadly specifying the intention of lawmaker for liability, etc.);
      • Rules (for specifying the procedure prescribed in the Act);
      • Notification (for carrying out any amendments in Act or Rule);
      • Circulars (for clarification of terms used in the Act or Rule);
      • Forms (for procedures specified in the Rule);
      • Case laws (decided by various courts).

Criticality of department

The functioning of the department is very important due to:

      • All stakeholders (vendors, customers, investors, Govt., manpower, etc.) expect all compliances being followed by the organisation → Expectation of transparency & independence of functioning → builds outsiders’ confidence in trusting the organisation;
      • Disputes / litigations involve huge cost (professional fees, interest, penalties, deposit of portion of disputed amount) → involves time & money → Reduction of profit margin or locks up the capital in the shape of deposits or refunds ;
      • Transfer pricing laws for transactions among related parties (overseas & domestic) demand documentation for justifying the transactions done at arm’s length price → huge amounts are under litigation;
      • Indirect taxes are to be recovered from customers à once sale transaction concluded & goods / services delivered → difficult to recover disputed taxes from customers;
      • Collection of statutory forms for claiming concessional tax and entry permits from Statutory Authorities or customers or vendors → non-issuance & non-deposit result in deposit of tax alongwith interest & penalty;
      • Checking of documents for movement of goods upto or from organisation → if not proper; seizure of goods + interest & penalties.

Deliverables & Functions (i.e. expectations from the Department)

    • Statutory Laws
        • Ascertaining all laws applicable to the organisation;
        • Taking experts’ opinion in ascertaining organisation’s liability;
        • Timely registration;
        • Timely and regular deduction of taxes from vendors’ payments or collection of taxes from customers;
        • Ascertaining liability of taxes and timely deposit of taxes;
        • Timely and accurately submission of returns;
        • Timely issuance of certificates of payment of taxes to vendors / customers;
        • Collection of statutory forms for claiming concessional tax and entry permits from Statutory Authorities or customers or vendors;
        • Checking of documents for movement of goods upto or from organisation;
        • Fast assessment of cases with Compliance Authorities.
    • Internal
        • Smooth finalisation of accounts with external auditors vis-à-vis compliance reporting;
        • Regular internal audits in compliance function → identifying the risks and its mitigation;
        • Independent verification of compliances before Customer’s verification → rectifying the mistakes;
        • Guiding & training other departments (purchase & marketing) with the changes in law and practices to follow before
            • releasing the purchase orders to vendors; or
            • accepting orders from customers.
    • Importance of Training
        • Training prepares for better understanding of law and provides latest changes;
        • Good consultants’ guidance → very important → reduction in errors.

Important developments in the Compliance function

    • Difficulty in comprehension & analysis due to Information overload (lot of information available) from
        • Internet websites;
        • Digitised laws and court cases;
        • Emails & SMSs;
        • Conferences & Seminars;
        • Tax Journals & Magazines;
        • Tax Manuals, etc.
    • Revenue Authorities
        • Fast updating with technology and moving towards paper-less working;
        • Work moving to assessee and consultants for data-entry and updation;
        • Early collection of taxes and early filing of returns;
        • Adoption of smart assessment tools.
    • Transfer pricing laws for transactions among related parties (overseas & domestic) demand documentation for justifying the transactions done at arm’s length price → huge amounts under litigation;
    • Usage of software for law compliance
        • Software has in-built checks & balances to control errors in filing;
        • Takes less time in compliance
    • Acceptance of digital signature for documents’ authentication.

Traditional / Normal ways of working in Compliance function

    • Law compliance without using software → taking more time in compliance function

Conflicts (Inter-departmental) / Challenges with Compliance function

    • Fast & reliable information
        • Information unless up-to-date, affects liability calculation;
        • Transactions are generated and approved by other departments BUT recorded by accounts department → delay in receipt of information/documents OR slow processing of transactions by accounts department → delay in accurate information submission → the department has to chase the documents.
    • Compliances vs. organisation functions
        • Increasing compliances from statutory authorities → pressure for early reporting and early deposit of taxes;
        • Late receipt of information / documents from other departments → Non-compliance or inaccurate submission of information → attracts interest & penalty;
        • Commercial terms (like collection of taxes or statutory forms, etc.) ignored by other departments, sometimes due to poor guidance given by Compliance function.
    • Blockage of funds
        • Frequent disagreement with statutory authorities → disputed demands raised by authorities → demand of deposits before approaching appellate authorities → blockage of funds till dispute resolution;
        • Misinterpretation of law and lack of training  → payment of taxes, interest & penalty

Some of the Process Implementation for better Compliance function

    • Process list of a statute regarding
        • Liability of registration;
        • Liability ascertainment (when the liability would arise?);
        • Calculation of liability;
        • Procedure, timing (when?) & periodicity (how many in a year?) of;
            • Deposit of taxes
            • Deposit of returns;
            • Issuance of certificate.
    • Status of compliances regarding (monthly):
        • Deposit of taxes
        • Deposit of returns;
        • Issuance of certificate;
        • Assessments;
        • Refunds / deposits lying with statutory authorities;
        • Year-wise statutory forms collection/ issuance.
    • Confirmation regarding (monthly):
        • No law infringement;
        • No notices received from compliance authorities;
        • No interest / penalties paid;
        • Not engaged in corrupt practices.
    • Product checking report
        • Products checked; defects found; reason for defects;
        • Action taken for rectification of defects.
    • Audits (Statutory / Internal / Management / Special, etc.)
        • Observations;
        • Risk identified;
        • Suggestions for mitigation.
    • Suggestions for improvement, complaints & feedback

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