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India's Step towards Digitized Economy

OCTOBER 06, 2015

By Abhishek A Rastogi, Rashmi Deshpande & Soham Mehta, PwC

WHILE we watch our Prime Minister address the tech pioneers in the Silicon Valley who not only made their marks on the world map but also transformed India's image from a country of snake charmers to that of mouse clickers, it is important to assess the significance of digital technology in India at all levels.We see smartphone, online payments and e-commerce transactions coupled with intelligent start-ups everywhere that promise to make our lives easier. This has been achieved by the ever flourishing private sector and the motivated youth that has become used to getting things done just by tapping their phones. While we have firmly placed ourselves on the world arena as the emerging tech innovators, the big question is how keen the Government is to introduce digital initiatives for ensuring smooth operations for individuals and businesses.

With this in mind, the Government launched the Digital India program to transform the ecosystem of public services through the use of information technology [http://www.digitalindia.gov.in/content/about-programme]. 'Digital India' aims at transforming India into a digitally empowered society and knowledge economy. The Government plans to implement this program by advocating the following three core components:

•  Creation of digital infrastructure

•  Steps towards use of digital services

•  Imparting digital knowledge to Indians

Before launch of 'Digital India', the Central Board of Direct Taxes ('CBDT')had already sown the seeds of digitization in 2007 by permitting authentication of TDS Certificates through digital signature. During the Budget of 2015, the Finance Minister announced few more steps to ensure digitization under the indirect tax regime. This article aims at critically evaluating those measures and examining feasibility in the long run.

Timeworn tradition of physical records vs the digitized world

Even though CBDT had foreseen the need of digitizing the process of issuance of TDS certificates long back, the Central Board of Excise and Customs ('CBEC') continued with the practice of only recognizing physical invoices and maintenance of manual records. However, this practice has recently proved archaic for the industry when the business has moved to computer generated invoice and maintenance of e-records. Rule 4A of the Service Tax Rules, 1994 clearly states that the signature of the authorized signatory is to be affixed on the invoices and any other records. Non-adherence of such practices resulted in, among other things,disallowance of credit. Hence, the industry made constant requests and recommendations to CBEC to follow the footsteps of CBDT and introduce relevant provisions under excise and service tax laws.

The plea of the industry was, acceded by the CBEC with introduction of Notification No. 5/2015-ST, dated 1 March 2015 ('Notification 5') under service tax law and Notification No. 8/2015-CE (NT), dated 1 March 2015 ('Notification 8') under excise law. The notifications provide option for issuance of digitally signed invoices and maintenance of digital records. The mechanism for implementation of the provision was introduced via Notification No. 18/2015–CE (NT), dated 6 July 2015 ('Notification 18') which gave effect to both Notification 5 and Notification 8 detailing the conditions and procedures for issuance, preservation and authentication of the invoices and records in electronic form. Any assessee who opts to maintain digital records and issue invoices is required to adhere to conditions provided in Notification 18. For instance, the digital certificate linked to the signature proposed to be used by the assesse has to be issued by the Certifying Authority of India. [The Certifying Authority of India shall mean to be the authorities registered with the Controller of Certifying Authorities. (Examples of such certifying authorities are Safes crypt, National Informatics Centre, eMudhra, TCS, etc.)

Assessee should intimate the jurisdictional Deputy/Assistant Commissioner fifteen days prior to exercising such option and the intimation should contain specified details relating to the person authorized to use the digital signature, name of the Certifying Authority, date of issue of digital signature certificate along with its validity and copy of the digital signature certificate along with the complete address of the Certifying Authority. However, there is no requirement to specify the details of the records that the assesse is willing to maintain electronically. It means that the assesse will still have an option to maintain the records both electronically and manually.

In addition, the assesse is required to maintain separate electronic records for separate registration. This leads to an understanding that if an assesse has multiple premises under centralized registration, then the records for all the premises will be maintained at the centralized premises. All the records are to be maintained for at least five years. Every assesse who opts to maintain records in electronic form shall produce specified records though email or on specified storage device to the Central Excise officer when called for verifying the authenticity. During an enquiry, investigation or audit, the Central Excise officer may direct the assesse to furnish printouts of the invoices or records maintained in electronic form for verifying the correctness. This means that even if the assesse has opted for maintenance of records in electronic form, the department has a right to call for printouts of the records. As the audits are frequent & compulsory in various cases, the assessees would be required to again take bulky prints.

Linkage to Information Technology Act, 2000

When the question comes to what is digital signature or how are the records authenticated and maintained electronically, there is no answer under any provision of service tax, excise or income tax. Undoubtedly, the only law which can come to rescue is the Information Technology Act, 2000 (the 'IT Act'). Notification 5 and Notification 8 have stated in unequivocal terms that the term 'digital signature', 'authenticate' and 'electronic form' shall have the same meaning as defined under the IT Act. The definitions of various terms under the IT Act are as follows:

'Digital signature' means authentication of any electronic record by a subscriber by means of an electronic method or procedure in accordance with the provisions of Section 3

'Affixing digital signature' with its grammatical variations and cognate expressions means adoption of any methodology or procedure by a person for authenticating an electronic record by means of digital signature

'Electronic form' with reference to 'information' means any information generated, sent, received or stored in media, magnetic, optical, computer memory, micro film, computer generated micro fiche or similar device

The IT Act also requires the digital signature to be affixed in a manner as specified by the Central Government to be a valid electronic signature. An invoice or an electronic record digitally signed or authenticated in a manner specified under the IT Act will only be considered as a valid invoice or record under service tax and excise law.

Flipside

This move towards paperless records by CBEC is welcomed by the industry especially due to the surge of unwanted litigation for service recipients while claiming credit and refunds on the strength of such invoices. Though there are efforts in the direction of digitizing the economy, there are certain anomalies that need to be addressed to successfully transform into a paperless economy.

One such hurdle in the way of any assessee desiring to maintain hundred percent of its records electronically is the maintenance of input/input service invoices physically. Though the assesseeas a service provider will be able to issue a digitally signed output invoice, the service receiver will be required to maintain invoices of inputs/input services in physical form.

Another stumbling block for maintaining records in electronic form is that the digital signature works only for records saved in pdf format. However, no business will work with all the records maintained only in pdf format. There will be documents and records maintained in MS word, MS excel, MS Power point, etc. formats which cannot be digitally signed.

Even though the steps taken by the Government are very basic and there can still bean unprecedented amount of innovation that can be introduced to be a full-fledged digital economy, India is today in a position to lead the world with new ideas of governance. Hopes are strongly pinned on the current Government's digital drive and new start-ups that could ring in a new era of progress.

[The authors are Director, Manager & Assistant Manager respectively with PwC]

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the sites)

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